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A Tax that Creates Jobs Instead of Just Enriching Owners?

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Paul Solman frequently answers questions from the NewsHour audience on business and economic news here on his Making Sen$e page. Here is Tuesday’s query:

Name: Frank T. Manheim

Question: I’m INTENSELY frustrated by an obvious but unanswered question about the battle over tax policy. The Republicans refuse to consider any increase on tax higher income brackets because “it would reduce investments by farmers and small businesses – essential engines for the economy” The Democrats insist that higher income earners must do their share. So why not enact a tax that LOWERS taxes for farmers and businesses for profits expended for new plant and labor, but INCREASED for other income? When I was a doctoral student in Sweden and the Social Democrats were in charge even THEY used a two-tier scheme like this. If either party proposed this and the other refused it would look bad for them.

Paul Solman: A very understandable frustration, Frank, though the tax fix you suggest probably isn’t as easy to implement as you make it seem. Moreover, consider this: might a tax incentive to re-invest in one’s business destroy more jobs than it creates? Suppose business owners used the money they saved to replace even more workers with machines? And to make the point even more starkly, suppose most of those machines were imported from abroad?

On the other hand, there is the tax proposal of mathematician and policy thinker Ralph Gomory, former head of research at IBM, former head of the Sloan Foundation (which he ran when we were given a first small grant a few years ago) and current Research Professor at New York University’s Stern School of Business. Gomory, among others, has suggested tax credits for companies that demonstrably increase employment here at home. Here’s an excerpt from testimony he gave before the U.S.-China Security Commission last year:

We need to consider a U.S. national economic strategy that includes incentives for companies to have high value-added jobs in the United States. If we want high value-added jobs,let us reward our companies for producing such jobs – whether they do that through R & D and advanced technology, or by just plain American ingenuity applied in any setting whatsoever.

The Asian countries have attracted companies by individual deals with individual companies. We do not have either the tradition or the knowledge or the inclination in the U.S. government to do that. An approach that is better suited to what the United States can do is to use the corporate income tax. We have already used the corporate income tax to spur R&D, so let us use it to directly reward what we are aiming at: High value-added jobs.

One way to do this is to give a corporate tax deduction proportioned to the value added created in the U.S. by a company. Consider two equal size companies, one chooses to send half its work overseas; the other keeps the work in the U.S. The second company will receive double the deduction on its income tax that the offshoring one receives. The effect can be made as strong or as weak as is desired.

When it comes to taxes, though, I’d be a little bit leery of romanticizing Sweden’s Social Democrats. Don’t forget that when the Swedish tax burden passed 50 percent of GDP ca. 1990, there was tax revolt that threw the Social Democrats out of office.

As usual, look for a second post early this afternoon. But please don’t blame us if events or technology make that impossible. Meanwhile, let it be known that this entry is cross-posted on the Rundown– NewsHour’s blog of news and insight.

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