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Creating a Sustainable Recovery

By       Message Matt Lykken       (Page 1 of 1 pages)     Permalink

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The roots of the current economic crisis go deeper than home prices and mortgages. Back in the late 1970s, a combination of global competition and labor productivity increases reduced demand for American workers, which in turn reduced the power of employees to demand higher compensation. Consequently, despite overall economic growth, incomes for the large majority of Americans have not increased in real, inflation adjusted terms for 30 years. This problem gradually moved up the income scale so that even the real average salaries of most college educated professionals have not grown over the last decade. Our economy is mainly driven by consumer demand. As consumer incomes have flat lined, our domestic economy lost the ability to grow naturally. Over the past decade, as ordinary Americans commented that mortgage lending practices were becoming insane and must collapse, the government tolerated the practices because they provided artificial stimulus for economic growth. Now that artificial device has disintegrated, and the government is looking to new debt funded artificial stimulus to replace it. That is unsustainable, particularly as one looks out 10 more years to our looming retirement funding crisis. A sustainable recovery must be built upon fiscally balanced solutions that address the underlying problem of demand for American workers.

 

A group of international tax attorneys, SharedEconomicGrowth.org, has developed one such solution, anticipating President-elect Obama’s promise to reverse current incentives to move jobs overseas and to reward companies for placing activities here in the United States. By simply taxing corporate earnings in a better and more progressive way, their simple three page bill can do the following:

  • - Reverse the current incentive to locate high value jobs off shore. Today corporate net profit can be increased 54% purely by having operations outside of the U.S.  Reversing this incentive would increase the demand for American workers and drive up wages.  Want evidence that this helps? Look at the growth in average hourly direct pay for production workers in manufacturing for 3 low tax countries. Between 1980 and 2004, Irish wages grew from 67.6% of the U.S. level to 107.5%. Swiss wages grew from 117.9% of the U.S. level to 141.6%, and  Singaporean wages grew from 14.5% to 35.6%, despite the fact that Singapore increasingly used imported Malay day labor while the native Singaporeans moved into white collar jobs.
  • - Eliminate the incentive to hold cash off shore. Today there is a penalty of up to 35% for bringing cash into the U.S. economy. Corporations accumulate hundreds of billions off shore each year to avoid this penalty. Removing it would add liquidity to our economy as those hundreds of billions flow home, recapitalize our economy with corporate dollars rather than taxpayer dollars.
  • - Eliminate the incentive to over-leverage corporations by putting debt and equity on an equal tax footing. Corporations borrow too much today, reducing their stability, because they have a tax motive to do so.
  • - Increase the equity returns to hard-hit IRAs, 401(k)s, and other retirement savings by up to 54%, restoring the value of savings and rewarding responsible middle class people who live within their means and save for the future.
  • - Provide incentive to place high profit winning operations in the U.S., revitalizing our economy, unlike the current bail-outs that are subsidizing operations that have failed. We should build our economy on stars, not on dogs.
  • - Reduce the current over-focus on speculative growth and return attention to solid cash income.
  • - Eliminate the tax incentive to keep cash locked in corporations, liberating investment dollars to flow to the best overall prospects, including new green technology.
  • - Stop the use of an individual tax subsidy (special capital gain rates) that applies equally to investments in foreign operations, redirecting those dollars to our own economy.
  • - Shut down tax abuses.
  • - Best of all, Shared Economic Growth would do all of this without adding a dollar to the deficit and while improving the fairness of our income tax structure.

The mechanism for this change is simple. Corporations would be allowed a deduction for dividends they pay out, limited to the amount of their pre-deduction tax liability. To the extent that they elect to pay out dividends, they would thus be freed from U.S. tax, so they would have no tax incentive to put their profitable operations elsewhere. Instead, they would be driven to place operations in the U.S. to minimize foreign tax. This would not increase corporate power. Since a corporation would have to pay out $1.00 to get a $0.35 tax benefit, corporations would become more dependent upon persuading their shareholders to reinvest, making them more responsive to control.

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Favorable tax rates on capital gains and dividends would eliminated, at least for corporate stock. This would cause the dividend deduction to be self funding for dividends paid to individuals. Because corporate earnings would be increased by up to 54% due to the lack of U.S. tax, lower bracket shareholders come out ahead, and upper bracket shareholders come out close to even on this trade.

Foreign portfolio investors would be subjected to an offsetting 35% withholding tax, holding them neutral

To make up for the revenue loss on dividends flowing to IRAs, 401ks, and defined benefit retirement plans, individual income over $500,000 a year would be  subjected to a tax at the rate of the employee FICA tax imposed on middle class wage income - a tax that people currently don't pay on most of  that over $500,000 income. The all-in effective income tax rate on persons earning over $500,000, including state taxes, would still be less than 40% on average. This improves the fairness of federal funding for overall retirement security. And, since the tax revenue lost on dividends paid to retirement savings accounts is only temporary, the net tax dollars collected from this offset will be recycled back to help the government to get through the coming Social Security funding crisis. Both personal retirement savings AND tax revenues for Social Security would be increased.  

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More information on the proposal can be found at http://www.sharedeconomicgrowth.org

 

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Matt Lykken graduated with honors from Harvard Law School in 1985 and has been working as a tax attorney for 27 years. He began his career with the Office of Chief Counsel, I.R.S., and for the last 22 years has worked as an international tax planner (more...)
 

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