This bang-for-the-buck analysis contrasts sharply with estimates for increased government spending. According to the White House, every dollar of new government spending creates about $1.50 of new GDP — much weaker than the effects of business tax cuts. And the White House analysis looks like a stretch. The IMF has a model that says every additional dollar of government spending creates only $0.70 of new GDP. So you have to borrow a buck to get 70 cents back. Not a good trade.
Clearly, neither of these spending multipliers holds a candle to the benefits of lower business tax rates. Incidentally, for deficit worriers, corporate tax cuts pay for themselves, as do lower tax rates on capital gains.
Fred Smith, the CEO of FedEx, does not have a Nobel Prize in economics. But he founded from scratch a gigantic global transportation and delivery company that has employed tens and tens of thousands of workers, something the Nobelists have never done. And Smith argues that the best job-creating measure would be a significant reduction in the corporate tax rate and a move to full expensing for business-investment tax write-offs. He’s exactly right.
Japan intends to cut its corporate tax rate. So does Great Britain. But the U.S. corporate tax rate of 35 percent, or 40 percent when states are included, is not even remotely competitive anymore. So why aren’t people talking about the economic benefits of unleashing business power? The rapidly growing Asian economies treat capital and business better than they’re treated in the United States. Same for Europe. What are we waiting for?
During the Reagan 1980s, when a deep recession led to a 10.8 percent unemployment rate, the Gipper cut domestic discretionary spending, lowered tax rates across-the-board (including corporate tax rates), and sped up tax write-offs for business investment. The first two years of that recovery generated nearly 8 percent growth, with hundreds of thousands of new jobs created monthly.
Right now, we are facing one of the largest tax hikes in U.S. history, scheduled for 2011. Taxes on investor capital and business will go up significantly. So will individual income-tax rates. This is exactly the wrong medicine.
When will Washington come to its senses, and unleash the power of capital and business to end all this pessimism and move us toward real prosperity?
– Larry Kudlow, NRO’s Economics Editor, is host of CNBC’s The Kudlow Report and author of the daily web blog, Kudlow’s Money Politic$.