Deinonychus antirrhopus

Kerry's Corporate Tax Cut

Kerry has decided to come up with a policy to cut corporate taxes. This is a fine example of "carrot-and-stick" policy. A politician wants to do something so he comes up with what he thinks is the appropriate carrot that the various actors (indiviuals, families, firms, etc.) will follow.

Don't get me wrong, I agree with Eric Engen,

"Some companies would view it as a good trade-off, some would not," said American Enterprise Institute economist Eric M. Engen. "But from an economic standpoint, lowering the corporate rate across the board is positive for the economy."

I'm not sure about the one time "tax holiday" thought. In an effort to get firms to bring back money from overseas operations and invest here, these profits will be taxed at only 10 percent. The main road block to this is that if the revenue stream from such an investment is expected to be lower here in the U.S., even with the low tax rate, firms probably wont bring the money back into the U.S.

Another interesting comment in the article that doesn't get much mention is Kerry's claim to achieve an unemployment rate of 4.1%. This will amount to 10 million jobs in Kerry's first year. I'm highly skeptical of this goal. Bush may not have been stimulating the economy in just the right way, but there has been considerable stimulus and job growth has been anemic. It is quite possible that the unemployment rate is going to stay right about where it is for a few years, maybe slowly inching down a little bit. The overall impact of this carrot should be pretty small.

Update: Here is Kerry's plan to create 10 million jobs. It is a mish-mash of carrot-and-stick policies such as a "new job tax credit". That is, even though employers who are going to hire somebody that will make them money, John Kerry will give them even more money. Granted, this will probably help in some small way to induce more employers to expand their payrolls, but it will also be a form of pork to many other employers who were going to hire anyways.

From Kerry's website,

The Secretary of the Treasury - in consultation with the Secretaries of Labor and Commerce - would determine which industries were classified as "manufacturing and other industries affected by outsourcing."

Funny I don't see anybody on the Left caterwauling about this like they did the comments by N. Gregory Mankiw about what constitutes a manufacturing job. One of the problems that should leap out at anybody who is familiar with the concept of rent seeking is that many firms will want to be catagorized as one of the firms that qualifies for this nice yummy, salty pork. Another question I have is how long will this tax benefit be in effect? If it is only a year or two, it could very lead to a number of layoffs when the tax credit is phased out/repealed.

Update II: Max is caterwauling right now (his word...well okay, it is my word, but he used it too!).

I do not look forward to a restoration of the economic policy of Robert Rubin, but the release of Kerry’s first major economic proposal promises exactly that. The personnel are certainly falling into place – Roger Altman and Gene Sperling, for two, both veteran Clintonoids.

Clintonoids...LOL, good one Max (reminds me of my wife's name for people in our area--Chinoids).

Kerry is foregrounding his corporate tax reform as a jobs measure. Right from the jump, he is mixing up the difference between an anti-recession, counter-cyclical policy, and a long-run structural one. His proposal is structural. As such, whatever its merits, it glosses over the fundamental issue of fiscal policy – deficits and monetary expansion. The implication is that the latter run on automatic pilot. In other words, Kerry has no short-term fiscal policy. Insofar as Kerry fails to distinguish between the harm from long- as opposed to short-term deficits, his fiscal policy stance is perverse.

I'll say this is one time where Max and I can agree on several points.

1. The getting to the 4.1% unemployment: How exactly, please?
2. The tax credit for new hires: Job turn-over means cycling from taxed to tax-favored.
3. The tax cut would likely have a positive effect on wages.

Don't get me wrong, getting to 4.1% unemployment would be great. I'm just not convinced that we can get there (although Max is). Well, if it turns out that unemployment goes that low, I'll happily admit to being wrong.

Posted by Steve at March 28, 2004 09:44 PM