Economy & Budget

Cut Taxes To Create Jobs

The president’s job summit this week may be good public relations, but it won’t do anything to help create jobs in this depressing economy. Despite the $159 billion the administration claims to have already spent on job creation (and hundreds of billions more in the pipeline), jobs continue to disappear, with no end in sight. And the only thing that could help turn the situation around isn’t even being discussed: major tax cuts for investors and businesses.

Instead of cutting taxes for those individuals and businesses with money to invest in creating new jobs, President Obama and Democrats in Congress want to impose a host of new taxes and higher tax rates on the so-called wealthy. The idea is as old as Robin Hood — take from the rich to give to the poor — but redistributing wealth doesn’t work for long. Instead of growing the economic pie, it ends up shrinking it.

If the president were really serious, he’d put more money back in the hands of those capable of creating jobs — and far more efficiently than government can — individual investors and private business. The United States has the second highest corporate tax rates in the world — over 39 percent — compared with 30 percent in Germany, 28 percent in the United Kingdom, and only 12 percent in Ireland. In fact, the U.S. corporate tax rate is substantially above the average 26 percent rate for all developed nations tracked by the Organisation for Economic Co-operation and Development.

In addition, we penalize investors by taxing dividends and capital gains at relatively high rates. Long-term capital gains and certain qualified dividends are currently taxed at 15 percent (except for individuals in the lowest income brackets), but those taxes are schedule to increase to 20 percent next year unless Congress extends the 5 percent cut that was enacted in 2003. And short-term gains are taxed as ordinary income, which means they are currently taxed at rates as high as 35 percent, but that, too, will likely increase to 39.6 percent when the 2003 tax cuts expire next year.

Democrats are loath to cut taxes for businesses, much less wealthy individuals. Democrats suddenly become deficit hawks whenever tax cuts are mentioned, claiming that tax cuts reduce revenues, thus driving up the deficit. And in the very short-run, they are right if spending cuts don’t accompany tax cuts. But when businesses use their new-found gains to expand and hire more employees, they’re creating wealth, and that leads to higher government revenues over time, even with lower tax rates.

In the 1980s, the economy grew as a result of the Reagan tax cuts, and tax revenues increased even as tax rates went down. In inflation-adjusted dollars, government revenue grew by 28 percent between 1980 and 1990 — and more importantly, the expanding economy created 35 million jobs, the largest number in a comparable period in peacetime in our nation’s history.

Democrats’ real objection to cutting business taxes, however, isn’t its impact on the deficit — no such fears are slowing adoption of an expensive and poorly conceived health care entitlement, for example. The reasons Democrats won’t cut business taxes is that they deem doing so as somehow unfair. The Democrats are wedded to so-called progressive income tax rates: the more you make, the higher your taxes. But progressive tax rates are just another way to redistribute wealth; call it socialism light.

In the coming weeks, Democrats on the Hill are set to introduce a host of new bills aimed at creating jobs, from public works programs favored by unions to special breaks for minority businesses to more government-backed loans for small businesses. But the problem with nearly all of these measures is that they have politicians and government bureaucrats making decisions about what kinds of jobs should be created to what workers in those jobs should be paid. We’d be far better off leaving those decisions to the private sector by simply putting more money in the hands of all businesses by cutting tax rates across the board. If we want to grow the economy, there’s no better way than cutting taxes.

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