With a Weak Economy, We Need Smarter Policies

SharedGrowth — Sun, 03 Aug 2008 14:45:59 -0400

The old tricks aren’t working any more. The government’s tools for a weak economy have been to lower interest rates, borrow and spend, or have a war. Now, interest rates are so low that you can’t earn enough on your savings to keep up with inflation, the government owes $31,666 for every man, woman and child in America, and we have two of the longest running wars in U.S. history. We need something new, something smarter.

Here’s a radical suggestion. Let’s stop collecting taxes in foolish ways. All we need are two simple changes to our existing system.

Start with capital gains and dividends. Right now, people who earn more money in a year than you could dream of making in your lifetime pay only a 15% tax on most of that income, which is less than the Social Security and Medicare taxes that any middle class wage earner pays on their income. With patience and good planning, they pay no tax at all on their gains. Why do we have such a strange system? Economists will cite two reasons.

First, if we tax these earnings from wealth as heavily as we tax earnings from work, then the wealthy will tend to spend more of their money instead of investing it. But the government just went deeper into debt sending out billions of dollars in checks to try (not very successfully) to get people to spend money. So why are we bribing the wealthy to NOT spend money?

Second, because people can avoid having taxable gains by simply not selling their stock, having a normal tax rate on gains will tend to keep investment dollars from flowing to the best investments, which is bad for the economy. But what if instead we got corporations to pay out all of their earnings as dividends and then have to ask people to reinvest the cash? That would be a much more effective way to make money flow where it should.

Now consider corporate tax. Under our system, if a U.S. corporation earns $1.00 in Switzerland and keeps the cash out of the U.S., it keeps $1.00. If it earns the same $1.00 in the U.S., it must give $0.35 to the tax man. So where do you suppose companies will put their most valuable activities? Worse, this is an addiction. Again, if the company brings the cash home it pays tax, so it reinvests anyplace but here. Reinvesting that cash at a 4% return abroad is as good as getting a 9.5% return after bringing it home. That kind of incentive is what has been killing U.S. jobs and keeping down U.S. wages. There is less demand for U.S. workers because this is a bad place to invest, so employees can’t demand as much pay.

What is the simple solution? Give corporations a deduction for paying dividends, and make up the lost tax revenue by getting rid of the capital gain benefits on the individual side and raising taxes a bit on people earning over $500,000 a year. On average, the over $500,000 group would still pay total federal and state income tax of only 37.6%. Cash would flow and jobs would grow. Wouldn’t that be smarter?

Matt Lykken is an international tax attorney and the Director of SharedEconomicGrowth.org.
Biographical information at http://www.sharedeconomicgrowth.org/home/aboutus.html

Confessions of a Job Exporter

SharedGrowth — Sat, 26 Jan 2008 15:45:18 -0500

Say you owned the corner store and needed to hire one employee. Say further that there was a federal law providing that if you hired an American citizen for that position, you would be subject to a fine equal to 35% of your income. If you said, "OK, if that's the law then I will hire a non-citizen", would you therefore be evil? Or would you be entirely justified in saying "If society wants me to hire an American, then they should change that law and not fine me for doing it"? The U.S. government does impose such a law, and multinational corporations face the shopkeeper's dilemma every day. That law should be changed

I am one of the people who decides to locate jobs outside of the U.S. Specifically, I am the head of tax for a U.S. multinational. It is my job to advise that high value manufacturing and research should, from a tax point of view, be located outside of this country. I advise that it is better to invest cash in foreign operations than in American ones. If the recent tax proposal of House Ways and Means Committee Chairman Rangel becomes law, I will advise that good administrative jobs should be moved out of the U.S. I don’t like giving that advice, but under current law that’s what the numbers dictate. I want to change that.

Of course tax isn’t the only thing that governs the decision on where to put operations. My company has a set of activities that we can afford to keep in the U.S. out of loyalty, but if we did too much of that we’d be acquired by another (probably foreign) company. For the rest of the operations, it’s just math - add up relative labor and transportation costs and the cost of materials, figure in tax, and that tells you where to locate, excluding places with homicidal or corrupt governments. For the highest tech, highest profit operations, though - the ones that involve the best jobs - tax becomes dominant.

U.S. law currently provides that most income earned abroad is only taxed by the U.S. when you bring the cash home. So, if you make $100 in America you only keep $65 after the U.S. 35% corporate tax, but you keep the full $100 if you earn it in the Dominican Republic. When you reinvest that $100 of D.R. cash you can use the full $100 if you invest abroad, but only $65 if you invest in America, due to the U.S. tax bite. So you invest in new foreign operations, not American ones.

Changing the law to tax the D.R. operations currently would not work. America is not the only economy that counts any more, and most countries do not tax foreign earnings at all. If the U.S. immediately taxed foreign earnings, our companies would get acquired or crushed by competitors, and we’d just lose our headquarters jobs. Like it or not, it is a global economy now, and this country does not control it.

But there is a simple solution that works. Give corporations a deduction for dividends they pay, and make up the tax revenue by getting rid of special rates for capital gains and by imposing a 7½% tax on individual income over $500,000 a year, which is all it takes to be revenue neutral. That would make the U.S. the best location in the world for high value operations. It would restore our economy and give middle class workers market power.

There are plenty of proposals circulating for mostly hokey ways to stimulate our weak economy. The American people need to demand a real, long term solution. Change the rules so that I can tell my employer to put all the best jobs here.

Matt Lykken is a tax attorney and is Director of SharedEconomicGrowth.org. Details of the proposal can be found at www.sharedeconomicgrowth.org .

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With a Weak Economy, We Need Smarter Policies

Confessions of a Job Exporter