We received another disappointing jobs report Friday, which now continues an annual pattern of ‘jobs report’ disappointments in the beginning of Spring. Some will blame the sequester, some will blame the tax increases, and some still will find a way to blame George Bush. It is obvious, however, that four years into our “recovery” a different idea than government spending is needed to create jobs, and get the kind of growth in our economy that we used to get after recessions. This is why the best jobs program would be to eliminate the tax on Corporations, and move to a simpler system where all taxes are paid at the individual income level. This idea solves two problems with our tax code: a perception of fairness; and slow jobs & economic growth.
Thanks to Warren Buffet and Democrats, there is a complete misunderstanding of why the individual capital gains and dividend rates are lower than those for regular earned income. Those who understand that these earnings have already been taxed at the corporate level, and involve risk taking, have chosen not to explain it. The President has used the fact that these rates are lower as a battering ram to mislead people into believing the system is set up against them and unfair. Stories such as ‘Mitt Romney not paying as high a percentage as someone who works’, helped steer this perception.
The United States has the highest corporate tax rate in the industrialized world at 35%. Politicians have talked of corporate tax reform that would bring this rate down to 25%, while eliminating loopholes. Even with this idea many countries will still be below ours, such as Ireland whose rate is 12%. Going to zero would end the competition, since other countries could only match us. There do need to be safeguards put in place so that C-Corporations are not individuals masquerading as a company (perhaps a 50 person minimum for a C-Corp). The other types of companies (LLC’s, Sole Proprietor, Partnerships, and S-Corps) are already taxed as personal income. The revenue loss would be made up by taxing dividends and capital gains at the individual earned income rates. In other words, rather than having a different (lower) tax on these types of income, the rate would be the same regardless of how your income was earned. Imagine the flood of companies that will want to relocate to the United States to get the zero rate, and the jobs that will accompany these moves.
When you hear people from all sides of the political spectrum playing the blame game for continued anemic growth and jobs creation, listen if anyone has a solution. You will hear ideas from the administration with words like investment, infrastructure, education, etc. Just remember that we have never had a recovery lead by government spending. Since 1978 there was an understanding among the parties in Washington D.C. that a lower Capital Gains rate spurs investment, which helps the economy. The current crop of Democrats led by the President would rather engage in class warfare than solve problems. The idea of eliminating the corporate tax will spur growth, create jobs, and make sure that Warren Buffet the same percentage as his wealthy secretary.