Economics Even The Chinese Communists UnderstandOct 15, 2008
There is a lot of talk about the economy these days by candidates, commentators, journalists, financial professionals and anyone else with a camera, microphone or Web page. These issues are important for families who are stressed with providing for their children and even their older parents. One complaint people have is that many types of jobs once prevalent in America now are done overseas. This is true and it makes the corporations that move those jobs overseas easy targets for demagogues who do not understand economics or the purpose of a business enterprise, which is to make a profit (creating jobs is byproduct of profit, not the other way around). The big target lends to the easy caricature of certain companies as villains, and demagogues always look for villains to prey upon the fears of people who are uncertain about their futures. So, how to slay the villain? In a political/economic sense, it's to hit them with higher taxes — that'll teach'em. Besides, "paying taxes" is the new "patriotism," according to Joe Biden, and you better learn that now (See YouTube video here). Nothing could be more misguided and nothing could be a more serious threat to the economic well being of the country and American families looking to improve their lives. Understanding why it's misguided is something we all understand at heart, though it gets lost in the anxiety of troubled times and easy to strike out at undeserved blame and believe in false solutions.
Everyone knows (or should remember) that corporations don't pay taxes — they simply pass the costs they incur through taxes to the price of their goods and services — which we pay at the pump, the store, the restaurant (see this short list of prices affected by taxes). It's that simple. So companies look at taxes as an expense, just as they look at energy, machinery, maintenance, supplies, etc., as expenses. If it can lower expenses by moving a factory near a supplier, companies do it. We see it all the time. So doesn't it make sense that if their tax expenses are greater here, than say in Ireland which has a low, flat tax, they will move where they can cut costs? Raise the corporate tax all you want to get even with those evil businesses and not only will you lose more jobs, you create more inflation by jacking up the prices they inevitably will charge. So we get hit from both sides.
How to solve the conundrum? Simply lower the corporate tax rate. You know the U.S. corporate tax rate must be high if it is more profitable for some companies to move operations overseas rather than have the convenience of domestic operations and transportation, etc. Exactly how high is the U.S. corporate tax rate? It is the second highest of the 30-member Organization for Economic Cooperation and Development at 39.3 percent (see list here). Only Japan is higher. Communist China, which is not an OECD member, has a 25 percent rate (see here). Furthermore, see how our individual states stack up against the OECD. It's none too pretty.
This is basic economics and it is a direct reflection on the travesty of public education that more people do not understand these simple, basic concepts, which leaves them open to persuasion by the play to emotional demagougery by liberal politicians. In 1972, George McGovern ran on a similar platform to Barack Obama's: Raise taxes on the rich and corporations and give everyone else a paltry redistributionist check of a few hundred dollars. He lost 49 states to Richard Nixon. Just losing to Richard Nixon was an accomplishment. To get comprehensively dismantled by Nixon shows how out of touch McGovern was (and there was an unpopular war, then, too, that people wanted over). That Obama's almost cloned economic plan has not made him a laughing stock is remarkable. Has America's economic IQ disintegrated that fast? (See short, but instructive blog post from the Cato Institute, here.)
Obama showed his utter lack of economic IQ in the second debate when he responded to John McCain's (see here) charge that his plan to tax people who make more than $250,000 would kill small businesses by saying, "there are only a few small businesses" that make that much. Really? Many small businesses are incorporated so that the owner's income is the business' gross income. That's why expensing deductions and low taxes are essential for this sector of the economy which produces 70 percent of American jobs. Obama's retort was one of a man who's never worked in the for-profit world. If a small business isn't grossing $250,000, it's not in business at all — at least, not in the hiring/job creation part of business (i.e., it's a self-employed, individual contractor or consultant).
In fact, according to Americans for Tax Reform, three out of every four businesses in the top 5 percent tax bracket is a small business. There are 26 million small businesses that employ 116 million Americans and hundreds of thousands of those businesses — sole proprietorships, partnerships, S-corporations and family farms — who pay taxes at the individual or joint-filing rates would get hammered under his "tax the richest 5 percent" plan. Forget their employees. The families of the family-owned businesses, who are paying for college, a car payment, a mortgage, etc., would face real devastation. (National Review adds more light to the conversation, here.)
We've all heard the expression we get the government we deserve. When it comes to the economy — and therefore opportunity and financial security for families — it comes down to this: When the Chinese communists undertand tax policy better than Americans, we deserve the economy we get.