Create Jobs: Bring Capital Home

One of the central contradictions of the Kerry Democrats is that they love jobs, but they hate the businesses and employers who create them.

The economic agenda of the Democrats these days starts with the premise that taxes on employers should go up. John Kerry wants to raise the highest income tax rate from 35% to 40% or more. Since two of every three tax filers in the highest income tax bracket is a business owner, it’s hard to conceive how these higher tax rates on job creators will increase hiring.

We know how to create jobs in this country. The Bush tax cut of 2003 has led to nearly one million new jobs in just the last year. Going back further in time, from 1982-2000 the United States was a job creation machine. A brief glance at the Bureau of Labor Statistics data indicates that over that 18-year boom period, U.S. employers hired 36 million new workers–a level of new job creation unprecedented in world history.

Where did the jobs come from? The Reagan tax cuts. It turns out that one of the unappreciated impacts of the reduction in personal, corporate, and capital gains tax rates in 1981, was that the United States overnight became a mighty attractive place to invest. From 1982-2000 the U.S. imported about $1.5 trillion more in capital than Americans exported. This in-migration of capital led to a boom in new factories, plant expansions, technology centers, and industrial output. For all the talk of “out-sourcing of jobs,” the truth is for the past 20 years the U.S. has been a massive importer of jobs–thanks in large part to falling U.S. tax rates, especially compared to Germany, France, and Japan. In the 1980s and 1990s the U.S., in fact, created more new jobs than all of the Euro-zone and Japan combined.

Foreign investment in the U.S. creates jobs. I recently drove through Jackson, Miss., and on the interstate I passed by one of the largest factories–at least five city blocks long–I have ever laid eyes on. It is a Nissan factory, and it employs more than 5,000 Americans. These were high-paying manufacturing jobs.

The Bush tax cuts, especially the cuts in capital gains and dividend taxes, have created a mini-boom in investment spending. Business investment and productivity levels have soared in this bullish environment of low interest rates and lower tax rates on investment income. In the year since the Bush tax cuts, the unemployment rate has fallen by half a percentage point. At a 5.6% unemployment rate, we are now well below the 8% unemployment average of the European Union, thanks to their higher tax rates, more generous unemployment benefits, and more rigid union work rules. Meanwhile, John Kerry has a bad case of Euro-envy and wants us to be more like them.

All of this is to say that if we want to generate more good-paying jobs here at home, a precondition is to continue to lure investment to these shores. Congress is now debating a tax bill that would do just that. The centerpiece of that tax bill is legislation originally sponsored by Republican Sen. John Ensign of Nevada and Republican Rep. Phil English of Pennsylvania. Called the Homeland Investment Act, this tax cut would serve as a magnet for such capital and would cost the Treasury virtually nothing in lost revenues. It might even gain tax receipts for Uncle Sam. The plan would allow U.S. firms to repatriate profits that they have earned overseas without having to pay the corporate income tax rate of 35% on this money. Instead, firms with large foreign profits–companies like Hewlett Packard, Pfizer, Microsoft, and Sun Microsystems–could bring this investment capital into the U.S. and pay a one-time border entry tax of 5.25%. This means we make money on something that we want firms to do anyway: Invest their profits in America.

New Factories

How much new investment could we expect to get from this tax change? Independent analyses by Price Waterhouse Coopers and Bank of America predict a windfall ranging from $135 to $300 billion of new capital within a year of passage. To put that number in perspective, U.S. taxpayers just sent $85 billion to Iraq to rebuild that nation. The Homeland Investment Act brings in two to four times that amount for the “rebuilding” of industry and factories here at home.

Currently, about $600 billion of U.S. corporate earnings are parked offshore to avoid the hefty tax penalty imposed on bringing these funds back to America. We in the United States are virtually the only people in the world who force our companies to pay taxes twice on income earned overseas. For example, a U.S. firm doing business in Germany pays an income tax in Germany, then a full corporate income tax in the U.S. if the money flows back to the U.S. In this example, the firm has an incentive to reinvest the profits in Germany, not here.

The victims of this policy are U.S. workers and shareholders in American firms. Shareholders lose because of the double tax penalty on corporate profits repatriated back to the United States. Stock values would rise if the Homeland Investment Act were passed, just as stocks rose when Congress cut the capital gains and dividend taxes.

On average, it costs about $50,000 to $100,000 in business investment to create a new manufacturing job in the U.S. By that measure, the Homeland Investment Act could mean the creation of as many as 500,000 new jobs next year for factory and technology workers. That is the equivalent of 100 new factories the size of the one I saw in Jackson just a few weeks ago. For many economically depressed communities, this act could mean financial salvation.

Now back to the Kerry Democrats who argue–predictably–that this plan is a corporate tax giveaway. These very same Kerry Democrats complain in their next utterance that American firms who invest abroad for tax-saving motivations are “Benedict Arnolds.” But this tax plan gives multi-national firms a powerful incentive to import tens of thousands of new jobs and the Kerry Democrats hold up mindless roadblocks, as they entangle themselves in their own moronic class warfare rhetoric. As I said: They crave jobs, but abhor the idea of businesses’ making money.

So now a tax plan that costs the Treasury almost nothing, brings hundreds of billions of dollars of investment capital into the United States and creates jobs is waning in the U. S. Senate. Who are the Benedict Arnolds in this debate?