Every Republican candidate has an economic plan they say will create jobs. The truth is that the ability of any president to directly create private sector jobs is very limited, but he can set the focus and present a plan that his/her administration can follow and solicit the support of Congress and the American people to approve and implement his plan through legislation and funding. The legislation that Congress passes and the President signs can either help or hinder the private sector to create jobs. The funding that Congress allocates provides the fuel to accomplish the plan.
Most of us are familiar with the old adage that small businesses create up to 80 percent of all jobs; however, the new Census Bureau database called Business Dynamics Statics shows that it’s not so much small businesses that create jobs as it is new businesses. In his book, Great Again, CEO Henry Nothhaft wrote, “all the major innovations that powered the American economy to unrivaled prosperity over the last fifty years – from semiconductors and personal computers to software, biotech, and the Internet – were all created by small start-ups. So were all of the 40 million new jobs created in this country since 1977…”
However, not every new business has the potential to grow and produce a significant number of jobs. As Rodney Stark wrote in The Victory of Reason, the basis economic fact is “all wealth derives from production. It must be grown, dug up, cut down, hunted, herded, fabricated or otherwise created.” Because of the jobs multiplier effect, businesses that manufacture a product, whether it’s a hardware or software product, have the highest potential for creating jobs as they grow and succeed. However, these companies will only create American jobs if they manufacture their products or perform their services in the United States.
Most of the plans of the Republican candidates’ plans involve cutting taxes, cutting government spending, reducing the size of government, eliminating burdensome regulations, and repealing what they consider onerous legislation. Do their specific plans provide a platform to create jobs from production? Do their plans provide incentives to manufacture products in America? If they don’t, what should their plans include?
Since all of the Republican candidates recommend reducing corporate taxes, let’s examine why this would be beneficial for creating jobs. Right now, American corporations are at a disadvantage compared to other countries: our tax rates are the second highest in the world next to Japan’s, averaging 35 percent at the federal level.
The Organization for Economic Co-operation and Development (OECD) has conducted a number of empirical studies by OECD economists and others that discovered the best tax rate that maximizes revenue and compliance is 25 percent. The studies found that high corporate income tax rates have the most harmful impact on long-term growth and lowering tax rates can lead to significant productivity gains in the very companies that have the most potential to contribute to economic growth.
Governor Mitt Romney and Ron Paul propose reducing corporate tax rates to 25 percent; Governor Perry proposes a reduction to 20 percent; Rick Santorum to 17.5 percent; while Newt Gingrich proposes a reduction to12.5 percent. There were no specific recommendations on former Utah Governor Jon Huntsman’s campaign website on reducing corporate taxes. He seems to base his American Jobs Plan predominantly on increasing free trade through additional free trade agreements.
Three candidates, Governor Romney, Governor Perry, and Rick Santorum propose to create immediate jobs by allowing corporations to “repatriate” profits being held offshore by foreign subsidiaries or divisions at a reduced rate of 5 to 5.5 percent. Over 1.2 trillion dollars could be brought back to America in a matter of days that would provide capital for investment in plants and equipment in the U. S. and hiring more workers to run the equipment.
Currently, the U. S. operates under what is known as a “worldwide” tax system, meaning that business income is taxed at the U. S. rate regardless of whether the income is earned within American borders or overseas. American companies pay the corporate tax in the host country, and when profits are repatriated back to the U. S., they pay the difference between what was paid to the host country and what would have been owed under the U. S. rate. Our higher corporate tax rate provides an incentive for companies to keep their profits offshore and not repatriate them. The U. S. is now the only country in the OECD that adheres to the “worldwide” tax system while imposing a corporate tax rate above 30 percent. A reduced rate for “repatriation” of corporate profits was provided by the Bush administration in 2004, and corporations have been hoping for the opportunity to do so again. To prevent this problem in the future, Governor Romney and Governor Perry propose switching to a “territorial” tax system in which income is taxed only in the country where it is earned.
In order to succeed and grow, businesses, and especially manufacturers, need to make long-range plans on allocating funds for R&D and capital investment. Thus, businesses would benefit by making the R&D tax credit permanent and either reducing or eliminating the capital gains tax. Governor Romney, Governor Perry, and Newt Gingrich support eliminating the capital gains tax altogether; Ron Paul proposes cutting and simplifying the corporate capital gains tax and Rick Santorum proposes to reduce it to 12 percent. They all support increasing and making permanent the R&D tax credit. In addition, all the Republican candidates support eliminating the Estate Tax, aka the Death Tax, which especially hurts small, family owned businesses where the heirs frequently have to sell the business to pay the Estate taxes instead of maintaining the business for the next generation of their family.
All of the above proposals for changing tax policies are included in the ten immediate recommendations for saving American manufacturing in chapter 10 of my book, Can American Manufacturing be Saved? Why we should and how we can. Only one candidate, Governor Romney, has included my top recommendation in his campaign economic plan: enact legislation to address China’s foreign currency manipulation. He also proposes to “direct the Department of Commerce to assess countervailing duties on Chinese imports if China does not quickly move to float its currency.” Some criticize this proposal by saying it would start a trade war. What they don’t understand is that we are already in a trade war, and China is winning.
We need a president who recognizes that currency manipulation is just one of the tactics China is using in their economic warfare with the United States. Other tactics they use have been described in my previous blogs and are well documented in the writings of Ian Fletcher, Senior Economist for the Coalition for a Prosperous America in his book, Free Trade Doesn’t Work, What should replace it and Why, and CPA’s blog www.tradereform.org.
In his book Great Again, CEO Henry Nothhaft provides additional recommendations of what tax policies should be changed to dramatically help start-up companies:
- Forgive or defer use taxes levied against start-ups for the purchase of new equipment
- Reduce or defer the statutory and marginal income taxes paid by start-ups in their first three years of existence
- Create special tax breaks, capital grants, and incentives for capital-intensive start-ups, especially manufacturing start-ups
- Provide an innovation tax credit that would give small start-ups half of the money back that they spend on getting a patent
I heartily concur with these recommendations based on my own experience working with start-up companies in business and as a member of the steering committee of the San Diego Inventors Forum (SDIF),
Additional economic proposals of the Republican candidates that would help create jobs would be to repeal the Dodd-Frank act and Sarbanes-Oxley act. At the very least, we need to exempt firms under $500 million in market value from the costly audit and report requirements of Sarbanes-Oxley. These onerous requirements have hindered technology-based companies from securing growth funding through the IPO market according to Henry Nothhaft.
Of course, all of the Republican candidates have pledged to play a role as president in the goal of repealing Obama’ Health Care Act, which would add at least $500 billion in taxes to the burden already borne by American individual and corporate tax payers.
I urge every American voter to not just pay attention to the candidates’ sound bites from their ads, debates, and interviews. Check out their websites and read for yourself what they propose to do as president. Don’t just vote along party lines. Make your own personal decision based on facts and gut feelings. Support the candidate you choose by donating and volunteering. Join your voice with others who want to create jobs and save American manufacturing. Besides the Coalition for a Prosperous America already mentioned, check out the American Jobs Alliance, a new independent, non-profit, non-partisan organization.