One number should be in the minds of all Democrats seeking reelection next year, including President Barack Obama: 9.2 percent. That’s the current U.S. unemployment rate, and as many prognosticators have already noted, it is several points above the historical threshold for reelection. If Democrats and Obama have any hope of job retention in 2012, voters need some good job news over the next 15 months.
Yet Democrats have few realistic options to goose the economy and create jobs. They can’t spend more money on an economic stimulus because Republicans will block any new spending. Assorted tax cuts on income and home buying could help, but they would be equally tough to pass and unlikely to have much impact in such a condensed time frame.
But there is one policy Democrats could pursue to spark the economy, create jobs and cut the deficit. They’ll just have to work side-by-side with Republicans, who are pushing a very specific tax cut.
Republicans want companies that make money overseas to bring cash back to the U.S. without paying the high 35 percent U.S. corporate tax rate. These companies reason that the money was made overseas and already taxed overseas, and if Uncle Sam insists on taxing it again, this money will remain overseas. U.S. companies have parked some $1.4 trillion overseas but they would bring much of it back home were it not for the additional high tax rate. In 2005, Congress created a tax holiday which resulted in an estimated $300 billion returning to the US taxed at 5.25 percent.
Unions and (some) Democrats have argued against a similar tax holiday by calling it a “corporate giveaway” and pointing to data that the prior holiday just created bigger profits without much benefit to the economy. They also note that the Treasury Department says a tax holiday would only expand the deficit. The reason being is that it is a loss of theoretical tax revenue. This money will never come back if it is subject to the high US tax rate.
But Democrats can be a bit more clever this time around by tying the tax holiday to a company’s increase in U.S. investment or jobs. Under this approach, a company wanting to repatriate a billion dollars from overseas would pay a smaller tax (say, five to ten percent) – if it increased its U.S. capital spending or full-time work force by defined percentages. Another twist on this idea is to require companies invest a portion in an infrastructure bank, as Reed Hundt, former chairman of the Federal Communications Commission, recently argued.
Under this plan, the economy would surge from the real stimulus of added investment and jobs. More people employed also means less government spending and more government tax revenue.
Treasury’s argument that a tax holiday would be a net revenue loss to the government assumes companies will one day bring back the funds and pay the taxes. This is fallacious. Instead they will simply invest abroad, build foreign plants and hire foreign workers. So the IRS gets 35 percent of nothing, and Americans don’t get jobs.
Wouldn’t it be much better for the federal government to get five to ten percent of something, reduce the federal deficit, hire Americans and spur the economy?
This plan will help not only big companies, but smaller companies like Audiovox who successfully sell abroad. The plan would put Americans to work, cut the deficit and provide an area of agreement between the two parties at a time when few other good options have any chance of passing.
A healthy economy is good for all Americans, but it is especially good for President Obama and the Democrats seeking reelection. It’s now a question of whether Democrats can do what’s right and put more Americans back to work.
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