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For an Economic Turnaround, It’s Time for a Policy U-Turn

Poll after poll has shown that the American people are focused on the issue of job creation. For Americans out of work, or facing potential job loss, little else matters.

[IMGCAP(1)]Earlier this year, in the effort to turn our economy around and spur job growth, our leaders in Washington, D.C., were faced with two very different policy paths. Down one path was a return to the old-school big-government, big-spending, anti-corporate policies of the late 1970s — a path once thought to be relegated to the ash heap of history. The other path was one that has been blazed by most of the industrialized world at this point — a path that recognizes that lower corporate taxes are essential to competitiveness in this global economy, and that lower taxes create jobs. Unfortunately, President Barack Obama and Congressional Democrats chose the big-government, big-spending, anti-corporate path — and the results have been disastrous.

The approach of Obama and the Democrats has failed to turn the economy around, and, in fact, has resulted in an unemployment rate of at least 10 percent — a 26-year high. Indeed, despite administration claims about jobs saved or created, 2.8 million jobs have been lost since the stimulus became law. While the trillion-dollar “stimulus— has failed to deliver the jobs the administration promised, it has, unfortunately, succeeded in ballooning our nation’s deficit and piling on to a sky-rocketing national debt.

If we want an economic turn-around, then it is time for a policy U-turn.

Anti-corporate populism is certainly en vogue today. Some of the ire is well-deserved — the greed of a handful of corporate leaders is, in part, responsible for the economic troubles we face today. Unfortunately, however, much of this anti-corporate populism is the product of opportunistic politicians desperate to find someone to blame.

The truth is we cannot have meaningful job creation without policies that create an environment in which companies can grow and prosper, and a critical component of such an environment is a reduction in the corporate tax rate.

The United States was once the global leader in creating a tax environment that encouraged economic growth and created jobs. Indeed, it was the U.S. under Ronald Reagan in 1986, joined by the Margaret Thatcher-led Great Britain, which started the global wave of corporate tax cuts. The 1986 cuts, which lowered the top rate from 46 percent to 34 percent, marked the largest cut in the corporate rate since the tax was created in 1909.

As recently as 1980, the top corporate tax rates in industrial countries averaged 50 percent. Where Reagan and Thatcher led, however, the rest of the world followed. In fact today, the average top corporate tax rate for countries in the European Union is now 24 percent.

Cutting the corporate tax rate has proven to be a powerful force in spurring economic growth and development. According to Daniel Mitchell at the Cato Institute, the reason is simple. “Thanks to globalization,— he wrote, “it is much easier for capital to cross national borders, and investors naturally prefer lower-tax jurisdictions.—

Unfortunately, the U.S. has fallen far behind our global competitors in this critical economic trend that we once spearheaded. The top corporate rate in the U.S. has actually ticked up from 34 percent in 1986 to 35 percent today. In fact, our top corporate rate is now the second highest among countries in the Organization for Economic Cooperation and Development. Ireland, by contrast, has a top corporate rate of just 12.5 percent.

Cutting the corporate tax rate does not necessarily mean a drop in the revenue generated by the tax, just as raising the rate does not necessarily result in an increase in revenue. According to the nonpartisan Tax Foundation, “Many people would expect high tax rates to yield high tax revenues, but the reverse is often the case. Collection data from 2002 (most recent) demonstrate that many countries with high corporate tax rates — such as the U.S., Germany, and France — have lower-than-average corporate tax collections as a percentage of total tax collections. In fact, of the 13 states with above-average corporate tax rates, nine of them have below-average collections.

The converse is also true: Of the 15 states with below-average corporate tax rates, six of them (including Ireland, which has the lowest corporate tax rate in the OECD) collect higher-than-average revenue. In fact, only 13 of the 30 OECD countries meet traditional expectations by matching their high corporate rates with high corporate revenue or their low corporate rates with low corporate collections.

Democratic opposition to reductions in the corporate tax code and protectionist economic policies that they advocate simply ignore global economic realities. These positions may sell well to their liberal base, but the implementation of these policies is stunting economic growth and putting American businesses at a strategic disadvantage in the international marketplace.

Indeed, almost every economist agrees that the anti-trade, anti-corporate policies currently advocated by the Democrats costs jobs.

To grow the economy and create jobs, we need policies that encourage the growth of private business — not the growth of federal government. Cutting the corporate tax rate will spur economic investment and allow businesses to grow and add new jobs. The road back to a strong economy is a long one, but we won’t ever get there if we continue policies that keep us headed in the wrong direction.

Charles Bass is a former Republican Congressman from New Hampshire. Grover Norquist is president of Americans for Tax Reform.

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