Today, the Labor Department released its monthly jobs report showing that the U.S. economy added 216,000 jobs in March and unemployment fell to 8.8 percent. Despite these encouraging numbers, Americans still consistently tell pollsters that jobs and the economy are the most important problems facing the country. And yesterday, Gallup released a poll showing that the number one way Americans would like to see more United States jobs created is to stop sending new jobs overseas. That is a fabulous idea, and the simplest way to accomplish it would be to lower out nation’s corporate tax rate.
The United States was once a leader in tax rate reduction. In 1981, President Ronald Reagan passed a broad tax cut package to encourage economic growth. How well did it work? Just compare the drops in unemployment from both the Reagan and the Obama economic recoveries. Since the Obama recovery began 21 months ago, the national unemployment rate has fallen only 0.6 points, from 9.4 percent in July 2009 to 8.8 percent today. Contrast those anemic results with the robust job growth that occurred during the Reagan recovery in the ’80s. By the 21-month mark of the Reagan recovery, unemployment had dropped from 10.8 percent to 7.5 percent—a 3.3 point drop.
And Reagan didn’t stop there. In 1986 he went on to lower the federal corporate tax rate from 46 to 34 percent. The results speak for themselves: when Reagan left office in January 1989, the nation’s unemployment rate was just 5.3 percent. The world not only noted Reagan’s success but then went on to copy his successful tax cutting policies. In 1989 the developed nations in the Organization for Economic Cooperation and Development (OECD) had an average top marginal corporate tax rate well above the U.S.’s 34 percent rate. Since that time the world’s industrialized nations have dropped their average corporate tax rate to about 25 percent. The U.S., meanwhile, has gone in the opposite direction. We now have a 35 percent rate at the federal level that rises to 39 percent once the average of state corporate taxes are mixed in. And today, Japan is scheduled to implement its own corporate rate reduction, which will officially make our 35 percent rate the highest corporate tax rate in the world.
Owning the world’s highest corporate tax rate is a jobs killer. Imagine you are a global corporation looking to invest in a new factory that will produce goods for American consumers. Do you build your factory with hundreds of new manufacturing jobs in Canada, where the top central government tax rate is 16.5 percent? Or do you choose a location in the United States, where the top tax rate is 35 percent? Is that even a choice? Our high corporate tax rates are a huge manufacturing job repellent.
Liberals have long argued that corporate tax cuts are not necessary since the effective corporate tax rate (calculated by dividing the amount businesses pay in taxes by their incomes) is comparable to other OECD countries. But gaming the tax system to reduce your effective tax rate is not free. It requires a substantial investment in tax lawyers and lobbyists for major corporations to get your tax bill down. So again consider a foreign investor or medium-size corporation looking to expand production. Neither of the firms has the tax lawyers and lobbyists needed to lower their effective tax rate. Do they choose low-tax Canada, where they can focus on their core business and pay low taxes? Or do they choose the U.S., which requires significant resources devoted to tax law compliance and lobbyists in Washington to assure a low tax rate? Again, is this even a choice?
The U.S. economy is slowly beginning to finally add jobs to the economy. But so is the rest of the world, and many economies are growing much faster. If we want to stay competitive, if we want to stop sending jobs overseas, we must lower our corporate tax rate.