Kerry’s Tax Plan: Too Much Tinkering

Published September 1, 2004

In offering a plan purporting to “create 10 million jobs,” presidential candidate Senator John Kerry (D-Massachusetts) has become the latest of many national office seekers to embrace the fanciful notion that mere tinkering with the tax code can outsmart the free market. History proves otherwise.

The three biggest economic expansions of the twentieth century, under Presidents Coolidge, Kennedy, and Reagan, were preceded by straightforward reductions in federal tax rates. Unfortunately, Kerry’s very modest nod in that direction (a cut in the corporate tax rate of 1.75 percentage points) would be followed by a harsh increase–new tax penalties on businesses that, in his words, “take jobs overseas.”

Outsourcing Creates Net Gain in U.S. Jobs

Supporters of Kerry were buoyed by a General Accounting Office report supposedly showing that a majority of U.S. (and even more foreign-controlled) corporations reported no income tax liability between 1996 and 2000. But there may be less here than meets the eye.

Many of those businesses were offsetting their tax liabilities through use of provisions Congress enacted, such as employee benefit expense deductions. The effective overall corporate tax rate in the U.S. is higher than any other industrialized nation’s except Japan’s.

Lawmakers may decry corporations that relocate overseas, but reckless tax policies will only help push more businesses away from our shores. In fact, despite public concern over the “outsourcing” of white-collar jobs, a recent Wall Street Journal investigation discovered foreign firms send more office work here than our companies send overseas–contributing to a net value for the U.S. economy of $54 billion.

During the 1990s, three-fourths of all U.S. manufacturing growth came from the industries most open to worldwide trade and exports. Retaliating against foreign firms, or against U.S. companies with foreign ties, could therefore negatively impact employment in this sector.

Kerry’s other proposal, a tax credit for businesses that create jobs, is equally problematic. As former Treasury official Bruce Bartlett recently noted in a syndicated column, the overall employment picture is made up of millions of jobs lost and created in the space of a single month, a dynamic process that a tax credit can’t easily affect. In 1994, for example, the Labor Department found a Clinton-era jobs credit “did not induce employers to hire members of target groups they might not otherwise have offered jobs.”

Tax Hikes Would Hurt Small Businesses

One irony of Kerry’s jobs plan is that another Kerry proposal would further undermine its already minimal potential, by proposing to raise taxes on households in America making more than $200,000. In the Left’s fairy-tale world, robber barons and madcap heiresses populate this income bracket, but the statistics tell a quite different story. According to Congress’s own Joint Economic Committee, more than two-thirds of all personal income tax returns in the top bracket (which is actually higher than Kerry’s proposed income threshold) report at least some earnings from a sole proprietorship, partnership, or “S” corporation.

Kerry supporters counter that most full-time small businesses report incomes much lower than $200,000, but creating a tax barrier to their upward mobility certainly won’t help them raise the capital to get to the next level. Starving businesses whose owners have already reached this plateau isn’t any smarter as a policy, since by their nature such firms are homegrown enterprises that provide U.S.-based jobs.

Instead of a reward-punishment approach that uses a shriveled carrot and a clumsy stick, the “corporation” tax–really just a tax on business owners, managers, investors, employees, and consumers–should be reduced dramatically.

Restructuring the tax system itself could also free up far more in direct resources for job creation than Kerry’s plan could ever hope to provide. By the Tax Foundation’s estimate, in 2002 businesses (and by inference their customers) were forced to bear more than half of the $194 billion economic burden of complying with the federal tax code.

Other Areas Ripe for Reform

One place to begin such a reform would be by ditching antiquated laws allowing the IRS to tax the foreign profits of U.S. companies. Most other countries avoid such a policy. As corporate tax rates were thereby reduced, Congress could clear away the thicket of special-interest deductions and credits that thwart honest competition among businesses.

Even better, Congress could scrap the entire tax code and replace it with a single-rate, national, retail sales tax–and allow Americans to see the true cost of the federal government, an entity whose questionable bookkeeping exceeds that of any corporate behemoth.

Like Presidents Coolidge, Kennedy, and Reagan, the first presidential candidate who gets past mere slogans about “job creation” and focuses instead on removing the barriers to productive economic activity could win a new age of prosperity for America–not to mention the next election.

Peter J. Sepp ([email protected]) is vice president for communications for the National Taxpayers Union.