Jobs and Tax Cuts

 

As earnings reports come out, several companies are beating expectations, not only in bottom-line profits but also in sales.  While corporations have had to cut back and trim down in order to pull back on expenditures, many are finally starting to experience some real growth.

Why, then, are they still not hiring?  Last week I wrote about the fact that the political environment seems to be less than reassuring for business expansion and hiring.  A comment was made by a reader that corporate tax rates are lower now than they were under Ronald Reagan, and I can only assume he was alluding to his belief that the current rates ought to then be good enough to do the trick.

The solution, though, seems to be all about the trajectory, and confidence in the political class going forward.  Sir Martin Sowell, Chief Executive Officer of WPP, when asked by Larry Kudlow yesterday how the US can become a “re-emerging” market (in other words, attractive to investors as are the BRIC nations currently), his response was that the US must deal with our upcoming tax increases set for 2011 and our deficit, looking not at increasing taxes, but rather “looking at government spending.”

In a <a href=”http://elsa.berkeley.edu/~cromer/draft1108.pdf”>paper</a> written by Christina and David Romer in 2008, they come to the conclusion that “a tax increase of 1% of GDP reduces output over the next three years by nearly 3%.”  Christina Romer is the chief economic advisor to President Obama.

Why then, would this Congress allow the Bush tax cuts to expire at the end of this year, and why would the administration not support across-the-board tax cuts?  According to Larry Kudlow, when Bill Clinton decreased the capital gains tax rate from 28% to 20%, revenue increased by $80 billion, and when George W. Bush reduced the rate even further, to 15%, revenues went up $85 billion.  Couple that with the fact that Obama’s own chief economic advisor recently came to the conclusion that “<a href=”http://elsa.berkeley.edu/~cromer/draft1108.pdf”>tax</a> increases have a large negative effect on investment.”

Timothy Geithner has recently stated that the White House would like to see <a href=”http://www.nytimes.com/2010/07/26/us/politics/26geithner.html”>tax</a> rates for the top 2-3% of Americans increase in order to demonstrate to the world our commitment to dealing with our trillion dollar deficit.  Heaven forbid we actually cut spending and allow private business expansion through reductions in taxes not only for corporations, but also for top earners.  This encourages investors to invest, which thus encourages businesses to expand and ultimately hire more workers.

Is that really so difficult?

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