It's Not Trade, It's Taxes, Stupid!
In a desperate attempt to salvage their 77-seat majority in the U.S. House, Democrats are reaching into their grab bag of scare tactics to persuade voters that trade is responsible for the nation’s 9.6 percent unemployment rate.
The problem is, as usual, that the politicians have it all wrong. Trade isn’t the culprit of our current economic malaise; it is the antiquated and uncompetitive tax system that fear-mongering pols have been peddling for decades.
According to a new study by Professor William Melick of Kenyon College in Ohio, reforming our destructive corporate income tax would put the U.S. back on the path to prosperity. Ohio, for instance, is currently burdened with a 10.3 percent unemployment rate and stagnant economic growth. This poor record stems mainly from tax policies that discourage exports and job creation.
The U.S. currently has the second highest corporate tax rate in the nation, trailing only Japan, a country that is committed to lowering its tax burden. Some detractors immediately panic when economists broach the idea of lowering taxes for corporations, but middle-class workers stand to benefit just as much as evil corporations from tax reform.
According to the non-partisan Congressional Budget Office, middle-class workers bore the burden of 70 cents out of each dollar of corporate income tax. One reason for this impact is because the U.S. is the only country that engages in the destructive practice of “Worldwide Taxation.”
For Ohio, this means that if Akron-based Goodyear sells tires in South Korea, then Goodyear is forced to pay taxes in South Korea and the U.S. If a Canadian corporation sells tires in South Korea, they pay only the South Korean levy of 20 percent, or half the current U.S. tax rate.
This is a severe handicap for U.S. corporations and U.S. workers. The response of our elected leaders is anything but innovative. Some seek to convince our neighbors to raise taxes. However, over the past twenty years, every country in the developed world has reduced its corporate tax rate, except for the U.S. of course.
Going forward, there are some proposals that could boost exports abroad and increase employment at home. One promising proposal would increase tax deferral for corporations. For example, the U.S. tax on foreign earnings is “deferred” until the income is returned to the U.S. Former Clinton economist Dr. Laura Tyson estimated that increased deferrals could create as many as 425,000 jobs. Proposals to eliminate tax deferrals would obviously have the opposite effect.
Professor Melick estimated that the elimination of tax deferral could lower employment in Ohio by more than 11,000 jobs. For perspective, private sector job growth in Ohio was a mere 2,100 from June to July this year.
Often unseen, tax policy is the tail that wags America’s economic engine. As much as politicians demagogue trade and corporations, conducting business with the world’s other 6.5 billion customers is vital to our prosperity. Just ask Youngstown, Ohio. There, exports account for 20 percent of total economic activity.
Deterring trade and increasing taxes on American companies that do business overseas won’t create jobs for politicians desperate to see employment rolls grow. If Democrats continue to rely on the stick rather than the carrot, the only job they’ll waste bloated rhetoric on will be their own.
