Paul L. Caron

Saturday, January 17, 2009

WSJ: The Best Economic Stimulus: A Corporate Tax Rate of Zero

Wall Street Journal op-ed: Leave the New Deal in the History Books; Cut Corporate Taxes to Zero and Create Real Jobs, by Mark Levey:

By 1939 Roosevelt's own Treasury secretary, Henry Morgenthau, had realized that the New Deal economic policies had failed. "We have tried spending money," Morgenthau wrote in his diary. "We are spending more than we have ever spent before and it does not work. . . . After eight years of this Administration we have just as much unemployment as when we started. . . . And an enormous debt to boot!"

The problem was that neither Roosevelt nor President Herbert Hoover before him grasped the essential nature of the crisis, which was not the stock-market crash, but global deflation. ...

The same perils are now confronting President-elect Barack Obama, as the risk of deflation casts a long shadow over the economy. Federal Reserve Chairman Ben Bernanke and Treasury Secretary Henry Paulson have been correctly focused on shoring up financial institutions to prevent a collapse of the financial system, and stave off a severe decline in the general price level. If that were to occur, the unspoken fear has been that the U.S. and global economy could go into a deflationary death spiral that would cause the collapse of the international financial system.

As a short-term matter, the moves of the Fed and other central banks have been correct, but in the long term a return to growth will depend on dynamic job creation by American business -- not the U.S. government. ...

In addition to New Deal spending programs, a series of new taxes were introduced that crushed the innovation, risk taking, and growth plans of entrepreneurs, corporations and investors. From 1930 to 1940, the top marginal income-tax rate rose to 79% from 25% while the corporate income-tax rate doubled to 24% from 12%. In addition, Roosevelt tacked on an excess profits tax and undistributed profits tax. He imposed an excise tax on dividends. Even the new Social Security payroll tax added 2%. As a result, the New Deal forced the allocation of money away from the private sector. ...

The quickest way to strengthen the credit system and begin the end of this crisis is to get money into the economy for true job creation, and not into government work programs. The way to do this is to slash taxes. The U.S. corporate tax rate, currently the highest in the world, should be cut to 0% (corporate income would still be taxed, of course, when distributed to shareholders as dividends). The capital-gains tax should be cut further.

The positive impact on corporate-credit markets, the stock market, the attractiveness of the U.S. to foreign investors, and the willingness to take business risk and create new jobs would be immediate. Capital-gains tax collections would rise. Capital flows would be in the hands of those who are driven to build businesses and permanent jobs efficiently instead of pushing that capital through a government pipeline with endless amounts of friction.

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It seems like the easiest solution to restarting our economy is to give the money back to the people who spend it, the American taxpayer.

If our government is relying on the American tax dollar to fund the already passed $350 billion dollar bail-out relief program or TARP, the American taxpayer should decide how to spend it. Quite frankly, it seems stupid to give the money to failed Banking Institutions, Corporations and Manufacturers who we are already in debt or cannot afford to buy the manufactured product they produce. If “We, the people”, bail out these businesses and we are still indebted to them, isn’t that double dipping?

If the banks have the money but we cannot afford to borrow, what’s the point? If the auto manufacturers produce cars that we cannot afford to buy, what’s the point? If the credit card companies (legal loan sharks) are bailed out do I still owe my minimum monthly payment? If the student loan companies are still able to lend to students that won’t have jobs to pay them back after graduation, what then?

Why not give the money back to the taxpayer? Allow us to eliminate our own debt and begin investing in America again. We could pay-off mortgages owed to the financial and banking institutions, pay-off credit card debt, repay student loans and begin buying goods and services, plus stocks & bonds.

The U.S. population reached 300 million in 2008. We have $350 billion left in TARP alone and are proposing yet hundreds of more billions as an economic stimulus package to taxpayers, which has been proven not to work. The government could give each taxpayer $1 Million dollars and still save billions. THIS would restart our economy, solving both the “Economic Stimulus” and TARP allocation issue.

I know it would be too simple to hand over such a large amount of money to us and that the lawmakers would want to complicate things with politics and more laws so, maybe this is one way of doing it: First, the money could be held in a trust fund and allocated to individuals based on current, proven debt restricted to eliminating such debt. Second, the remaining amount could then be redrawn from an interest bearing account at given intervals protecting over spending.

I don’t think a thousand dollar tax stimulus refund check is going to keep people from losing their homes. If that’s all I get back, I’ll use it to pay my bankruptcy attorney.

From the farmer to the large corporate business owner the stimulus package should go to the individual taxpayer. The $350 billion dollar TARP should be the PEOPLE’S relief (stimulus) package. What started out as $300 billion dollars, the taxpayer is already responsible for the billions being spent in Iraq. Why not let us have some of it back to rebuild our own infrastructure?

We need to start over. Wipe the slate clean and reduce or eliminate some or all of our individual debts and I guarantee people will open their pocket books but, more carefully?

Posted by: Cherry Murwin | Jan 23, 2009 6:55:20 AM

"'Especially since corporations don't pay income taxes anyway!'

That's bull. The corporation I'm President of pays income taxes and every other one that makes a profit does too.

Posted by: ginner | Jan 17, 2009 4:09:57 PM"

ginner, you pass those taxes on to your customers in the form of higher prices.

Businesses do not pay taxes; they pay expenses-- inventory, labor, taxes, rent, whathaveyou.

To be successful, they have to cover all of those expenses in their product's price.

Posted by: Troll Feeder | Jan 19, 2009 3:38:14 PM

If nothing else, the current crisis has revealed all the psuedo-libertarians. Those who are all gungho for free markets, but are likely to be the first to queue up for bailouts unheard of in history when markets turn sour. Perhaps the corporate titans that are now queueing up for bailouts would like to ask the Caymans or Bermuda for a bailout.

Posted by: jon | Jan 19, 2009 6:52:16 AM

I can understand how lower corporate tax rates will increase the after-tax returns to investment, making additional investment more attractive. I'm also no economist, but if one aspect of the current economic crisis is a reduction in demand, in the short-term why would a corporation want to invest?

Posted by: us17094 | Jan 18, 2009 1:50:29 PM

Because the Dems and the Obamanians believe in higher tax rates, confiscatory ideologies and the immaculate taxation of the corporations in the Great Name of Fairness, they are not capable of believing otherwise regardless of facts or history. They believe their policies do not, can not and have never failed; all 'failures' are a result of insufficient money spent on stimuli and/or the intransigence of the Evil Ones: the political opposition of Republicans and their Right Wing Attack machine, etc. Their superior caring skills also deflect factual feedback. I am not sanguine. "IHS".

Posted by: Broadsword | Jan 18, 2009 4:38:03 AM

Too bad we've elected people to high office who don't have any common sense.

You realize I hope, that throughout the history of our republic common sense has been quite rare among our elected officials?

Posted by: Some Guy | Jan 18, 2009 12:48:12 AM

The best way to improve the economic, social, and security conditions in America is to :

Export a good chunk of the leftists out of America.

Then, about every problem (including this one) will correct itself.

Posted by: GK | Jan 18, 2009 12:41:07 AM

Zero would be nice. But perhaps we would be more likely to succeed if we attempted to cut the corporate tax rate to 12.5% -- the rate in Ireland. Despite (actually because) of this rate, less than half that of the U.S., Ireland actually takes in more corporate income taxes than does the U.S., as a percent of each country's GDP.

Posted by: DWPittelli | Jan 17, 2009 7:01:01 PM

anon see Ireland for a good example of business tax reduction. the u.s. is a very attractive destination for many foreign national corps and the troubles that are brewing in most of the emerging nations would drive many to the relative safety of this country.

Posted by: mike s | Jan 17, 2009 4:58:57 PM

Just like the "non-profits" that provide services and own assets. Level the field.

Posted by: Master of Obvious | Jan 17, 2009 2:44:59 PM

For long-term economic stimulus, the zero corporate tax rate should be a no brainer. For a quicker, short-term economic stimulus, what about paying down part the national debt? Doing so would put cash in the hands of people who want to buy bonds. Those are people who are likely to look for alternative safe investments, like bonds from well-managed companies. It seems like a better way to inject cash into the credit markets than buying banks. I am afraid that the real economic no brainers may be the people who report economic news in the national media. They are the ones who convince us to vote for our sorry excuses for politicians.

Posted by: GravellPyle | Jan 17, 2009 2:18:16 PM

And so yet another clueless monkey (that DOES NOT get it and perhaps never will) wanders in to park his rear in the Oval Office for four years. How long can four years last? A LOT longer than four years, if he's too stupid to listen up to those that know how this wonderful "machine" that drives our economy really works. Sigh; WE are probably screwed, but not "Him" and associated dingbats. Four years folks; think about it next time.

Posted by: Punkindrublic | Jan 17, 2009 2:11:38 PM

And the ironic part is that eventually it is going to happen anyway. It's just a matter of time before a major exporting country eliminates business taxes and gives their businesses a huge competitive advantage in the global marketplace. Every other major exporting nation will then have to follow suit if they want to compete.

So why not let that first nation be us? Seriously, do we want to lead and get the jump on everyone else, or merely be a part of the pathetic herd which will spend a generation trying to catch up to the leader?

Posted by: peter jackson | Jan 17, 2009 1:40:25 PM

They're addicted to tax money. As such, they act like a bunch of addicts. They just want more and more regardless of the consequences.

Posted by: Bitchin | Jan 17, 2009 1:33:00 PM

Especially since corporations don't pay income taxes anyway!
That's bull. The corporation I'm President of pays income taxes and every other one that makes a profit does too.

Posted by: ginner | Jan 17, 2009 1:09:57 PM

That is a common-sense solution that has been proven to work in the past. Reduced taxes result in more economic activity, more jobs, and enhanced tax revenue.
Too bad we've elected people to high office who don't have any common sense.

Posted by: BackwardsBoy | Jan 17, 2009 12:13:52 PM


Perfect. I'm sending the second paragraph to all my friends.

Posted by: robin4est | Jan 17, 2009 11:38:17 AM

Happyfeet is entirely correct. Obama and his minions know this, but are about as likely to do it as they are to beat their arms and fly about the room. It would effectively remove them from the perceived solution, thus be politically unrewarding. It will never happen.

Posted by: Jeffersonian | Jan 17, 2009 11:35:53 AM

As if that has a chance in hell of happening - regardless of its merits.

When it comes to money, there are basically two types of people: Those who think they can spend it better than you can and will take it away from you to do so and those who think individuals make their own best spending decisions. The former have been in power (and have been educating our children) for decades. The latter are a minority - and they are not called Republicans (at least not the Republicans who are elected).

Posted by: mrsizer | Jan 17, 2009 11:20:45 AM

A corporate tax rate of zero sounds very nice really. But there are dirty socialists what are in charge. Mark Levey hasn't been following the news I don't think.

Posted by: happyfeet | Jan 17, 2009 11:17:41 AM

You are exactly correct. Especially since corporations don't pay income taxes anyway! Only people do. However, the individuals who pay these taxes, usually the shareholders have an incentive to avoid paying them by moving production off-shore!

Posted by: 96Maroon | Jan 17, 2009 11:11:11 AM

"The quickest way to strengthen the credit system and begin the end of this crisis is to get money into the economy for true job creation, and not into government work programs."

And the evidence that jobs will be created is__________.

(Please, no Authur Laffer quotes)

And for the record, I doubt the stimulus package will work as advertised.

Posted by: Rusty | Jan 17, 2009 10:55:34 AM

Wouldn't a corp tax rate of 0% functionally convert C corps to S corps (although the rules might differ slightly)?

Posted by: anon | Jan 17, 2009 5:49:43 AM