We believe that an economic slowdown and maybe a recession is on the way in 2016. The stock market is off to a rocky start and that’s often a lead indicator of trouble ahead for business and jobs. Profits are down, business investment is poor, and consumers are hunkering down again.
We hope we’re wrong but it makes sense for Congress to get ahead of the storm and pass a recession-insurance stimulus policy. Cut the business tax rate to 15 percent. Paul Ryan and Mitch McConnell: Pass this now. This week.
Democrats Hillary Clinton and Bernie Sanders are spouting off economic nonsense of late — break up the banks, put Wall Streeters in jail, raise tax rates to 50 percent or more, spend another multiple trillion dollars. If the economy starts to tank they will want another debt-laden government spending plan. Sorry, been there. Done that.
But where is the Republican growth message? The GOP runs the House and Senate, but still no sign of a growth package to offer up a contrasting vision from the Bernie and Hillary show.
If the economy does sink into negative territory this year, the Democrats will surely demand more infrastructure spending, unemployment assistance, job training, and a panoply of “stimulus” budget busters that didn’t work in 2009 and won’t work now. The GOP response to this nonsense should be short and sweet: Been there. Done that.
What could be done right now to stimulate growth, investment, and investor confidence almost immediately? The answer is a business tax rate reduction. Pass a rate cut to 15 percent, with full capital expensing and a 5 percent voluntary repatriation tax on the $2 trillion owned by U.S. multinational firms that is parked abroad to avoid the high corporate tax.
This won’t cost the Treasury much in lost revenues, and who knows? It may raise money over five years through the money and businesses repatriated back to America. Apple and GE might bring back tens of billions of dollars for assembly plants and research centers on these shores.
The current U.S. rate of 39 percent (with state rates added) is the highest of all the nations we compete with. The rest of the world is at a rate closer to 25 percent, with some nations like Ireland as low as 12.5 percent. Let’s go from the highest rate in the world to one of the lowest and see what happens to capital flows.
We know the 35 percent rate is hurting growth. We have seen companies like Burger King, Medtronics, Pfizer, and dozens more leave the U.S. in search of lower tax rates. More companies will scamper out if this isn’t fixed — and they take jobs with them.
The international average has come down from almost 40 percent in 1990 to 25 percent today. For two and a half decades the U.S. rates haven’t budged, while the rest of the world keeps chopping. We’re the only country that seems to want to put a tariff on our goods and services.
Study after study tells us that the corporate tax at 35 percent is a loser. The American Enterprise Institute has found that wages rise much slower, if at all, in nations with high corporate tax rates. This happens because of less investment in the high tax nations, which means lower paying jobs. In other words, it’s not rich fat cat shareholders, but working class Americans who suffer the most.
Even President Obama’s own tax reform commission, headed by former Fed chairman Paul Volcker, found “deep flaws” in the corporate tax. It concluded that the corporate tax “acts to reduce the productivity of American businesses and American workers, increase the likelihood and cost of financial distress, and drain resources away from more valuable uses.”
Republicans are preparing their budget plan this week. They should use a process that Reagan used called Reconciliation to make room for a corporate tax cut jobs stimulus. This means the Republicans in the Senate will need only 51 votes to pass it once the House does so by a wide margin. We can imagine several Democrats in red states joining the GOP for this growth stimulus.
If Republicans can’t get such a bill through the House and Senate, what is the use of having GOP majorities in both chambers?
If Obama vetoes such a bill, austerity Democrats will pay a high price in November.
We’re all for a sweeping tax reform in 2017 and perhaps a flat tax with a Republican president in office. But it’s time for a tax cut down payment. Cut the corporate tax NOW.
Stephen Moore and Larry Kudlow are founders of the Committee to Unleash Prosperity.