Tax Hike Needed

It could be argued, then, that in an entrepreneurial economy higher taxes offer an incentive for entrepreneurs for trying harder, not a job-killing proposition as we’ve been told by our politicians. Higher taxes on the job creators could stimulate their creative juices and entrepreneurial ideas. What doesn’t kill us makes us stronger. By the same logic, cutting taxes on the rich could easily make them lazy. Indeed, we may be seeing a new speculative bubble inflating in financial markets because money managers have not really suffered the bracing discipline of a serious recession in 2008. They got a brief scare, which promptly turned into the bull market of 2009-11, when the Dow nearly doubled in a 24-month period.

A similar story is with U.S. corporations, which have the highest statutory corporate tax rate among leading industrial nations. The combined federal and state corporate tax rate in the U.S. is 39.3 percent, compared to 31.9 percent in other OECD countries and 33.8 percent in the large Group of Seven nations, according to the Tax Foundation. Other nations cut their corporate tax in the first decade of the 21st century, but they have not been able to beat American companies, which continue their global dominance. Among the world’s most valuable brands in 2011, according to the BrandZ classification, U.S. brands hold nine out of the top 10 positions, as well as 17 out of the top 25.

Even in a slow-growth period in the past three years, U.S. corporations have performed strongly, posting robust profits growth and accumulating trillions in cash holdings. Low profits and a lack of cash do not seem to be the key factors holding back job-creating investment.

The only glaring exception has been the auto industry. Detroit Big Three got into trouble back in the 1970s and, uniquely in the history of American business, have not been able to regroup and smash their competitors over a period of 40 years, during which the industry lost billions. Also uniquely, Uncle Sam had to take over a large industrial corporation to save it from bankruptcy. Today even storied Ford no longer appears among the world’s most valuable brands, which in the automotive industry are dominated by Toyota, BMW and even Hyundai.

 Untaxed Industry

It should be noted that the U.S. automotive industry benefits from extremely low taxation. Not of carmakers themselves, but in this case, of gasoline. Americans pay less than half as much at the pump compared to what European and Japanese motorists must shell out. Ironically, even in this globally competitive industry, tax advantages have made American automakers perennially lax, less technologically sophisticated, less cost-conscious and less responsive to changes in consumer preferences.

The U.S. government has introduced new fuel efficiency standards, which are supposed to double miles per gallon for the car fleets sold by automakers in the U.S. to an average of 53 over two decades. This may be a good way to jolt U.S. automakers out of their hibernation, but it is not an optimal solution, because it relies on government regulation and not a market mechanism. Doubling gas prices by gradually raising taxes at the pump would be far more efficient. Consumer preferences would force carmakers to develop more energy-efficient cars while also boosting alternative energy sources and creating those promised green-tech jobs.

Taxes in the U.S. have been falling steadily since the early 1980s and now the tax burden on the average U.S. taxpayer has declined to levels not seen since the early 1950s. Instead of the kind of universal prosperity that the anti-tax economists have been predicting, we have massive budget deficits and economic stagnation — a very different environment from what we had in the 1950s and 1960s, when tax rates were going up, and the 1980s and 1990s, when tax rates were higher than they are now. We are also suffering from a massive federal budget deficit that, unless economic growth returns soon, will inevitably bankrupt the nation. Perhaps we should try raising taxes to spur growth.

Alexei Bayer is an economist and author based in New York City.