As the economy continues to stagnate, President Obama is attempting to reverse the trend by announcing his new American Jobs Act. The bill essentially calls for more fiscal stimulus in the form of both tax cuts and greater spending. Unfortunately, the positive effects of fiscal stimulus are dubious at best and not likely to make any difference at all. Contra Obama’s plan, Kauffman Foundation scholar Brink Lindsey zeros in on the type of public policy that can lead to renewed and much needed job creation:
For public policy to be effective in responding to this grim situation, it needs to be based on a clear understanding of where jobs come from. And on that question, research from the Kauffman Foundation leaves no doubt: New firms are the main engine of job creation in this country. Specifically, from 1977 to 2005, there were only seven years in which existing firms created more jobs than they destroyed. The bottom line is simple: without startups, there would be no net job creation in the United States.
Additional Kauffman Foundation research reveals that this engine of new jobs began sputtering before the Great Recession. Census data show that the number of new employer businesses created annually began falling after 2006, dropping 27% by 2009. Meanwhile, the average number of employees per new firm has been trending gradually downward since 1998. And the pace of job growth at new firms during their first five years has been slowing since 1994.
The timing of the deteriorating employment picture suggests that the problem is structural as well as cyclical. And structural problems call for structural solutions. Specifically, the ultimate answer to restoring prosperity and vigorous job growth lies in policy reforms that create a more favorable environment for the creation and growth of new businesses. Barriers to entrepreneurship need to be identified and systematically dismantled.
This conclusion is further supported by my own research into the growth challenges confronting not only the U.S. but all advanced economies operating at the technological frontier. My findings regarding what I call “frontier economics” can be summarized as follows: The available sources of growth, and the policy requirements of growth, change over time with a country’s advancing economic development. In particular, as countries get richer they become ever more heavily dependent on home-grown innovation – as opposed to simply expanding existing activities or borrowing good ideas from abroad – to keep the growth machine humming. And since new firms play an absolutely vital role in the innovation process, that means that removing barriers to entrepreneurship becomes increasingly important to maintaining economic dynamism and prosperity.
Lindsey also lays out the major components of a Kauffman legislative proposal, The Startup Act, which provides policy reforms that would help break down barriers to entrepreneurship and increase job creation:
- an entrepreneur visa along the lines of the revised Kerry-Lugar Startup Visa Act
- green cards for foreign students when they receive so-called STEM degrees – degrees in science, technology, engineering, and mathematics – from U.S. universities
- exemption from capital gains taxation for investments in startups held at least five years
- 100% exclusion from corporate income tax for qualified small businesses on their first year of taxable profit, followed by 50% exclusion in the subsequent two years
- allow shareholders of companies with market valuation under $1 billion to opt out of Sarbanes Oxley requirements
- higher fees for faster, better service at the Patent and Trademark Office to clear the backlog at PTO
- mandate that all federal research grants to universities be conditioned on universities’ affording their faculty members the ability to choose their own licensing agents rather than having to rely, as they do at present, on their own university’s technology licensing office
- institute a requirement that all major regulatory rules (those with estimated costs of at least $100 million) sunset automatically after ten years
- subject all proposed and existing major regulatory rules to a uniform cost-benefit analysis
- institute monitoring of business climate in states and localities along the lines of what the World Bank’s Doing Business reports do for different countries
Effective consequences of income taxation are creating economic uncertainty and stifling growth. They are far from popular and even further from necessary. Throughout American history, income taxes yield approximately 19% of GDP regardless of marginal rates – indicating a spending problem as opposed to a revenue problem. With a sputtering economy and increasing national sentiment favoring cutting government expenditures, the only logical solution is the elimination of all income taxes and the implementation of a static rate consumption tax. This essential measure will empower individuals to make their own economic choices, instantaneously create jobs, and force the federal government to downsize.
Income taxes represent a restriction of economic liberty. Currently, government allocation of individual earnings denies people the opportunity to make decisions for themselves. However, the consumption tax enables citizens to make pre-tax choices. Certainly, more money in each hand translates to increased consumption, investment, and savings. Since consumption and investment fuel the markets, this can only lead to an uptick in economic activity while increasing the rate of growth of savings.
In the wake of eliminating income taxes on corporations, millions of jobs will be created virtually overnight. Businesses will no longer need to move offshore, exploit loopholes in the tax code, lobby for subsidies, utilize debt financing to offset tax liabilities, or seek out foreign labor markets to reduce costs. More importantly, corporations will flock to the United States knowing there is an environment of certainty in which their business can flourish. Certainty for business means stability for individuals, yielding prosperity for all.
Perhaps the greatest impact of instituting a consumption tax will be felt within the federal government itself. As entitlements engulf the budget, transferring the onus of planning for one’s future from government to the individual will have a monumental impact. Not only will people have more money and increased choice with fewer obstacles, but a limited social safety net can be salvaged to provide for those truly in need. Furthermore, government spending itself will develop a targeted, less frivolous process out of necessity – eliminating waste and inefficiencies.
In a true free market, a level playing field signals certainty to its participants – fostering and encouraging market activity. Eliminating income taxes in favor of a static rate consumption tax will accomplish this measure by removing unfair advantages to politically well-connected individuals, corporations, and special interests. Individuals will regain control of their respective financial futures by making decisions only they can make – how best to allocate income toward consumption, investment, and savings for their specific needs. Moreover, industries will realize an influx of competitors to innovate and open new markets, creating countless jobs in the process. As individuals and businesses are liberated from income taxes, government spending will readjust to its newly concentrated environment – thanks to the simple measure of adopting a consumption tax.
Here is a letter to the Los Angeles Times:
President Obama recently declared “it was time again for Washington to focus on jobs” (Now, Congress and Obama need to focus on jobs, August 3). Having already experienced the recent failures of economic stimulus under Bush and Obama, there is a better mechanism for increasing the lackluster growth rate of GDP and job creation – eliminating the income tax on individuals and corporations and replacing it with a consumption tax.
Eliminating income taxes will ignite a whole new jobs boom by creating an environment of certainty for businesses, removing the need to seek out loopholes and foreign labor markets. Corporations will flock to the US, leading to greater competition among industries that will create countless jobs in the process.
Moreover, eliminating income taxes will increase individuals’ consumption, investment, and savings, resulting in an improved rate of economic growth. Due to the ensuing rise in consumption, sufficient tax revenues will be collected to fund the federal government. Most importantly, the removal of unfair tax advantages to politically well-connected corporations, individuals, and interest groups will create a level playing field and certainty for all market participants – fostering and encouraging economic activity.
Craig D. Schlesinger
Here is a letter to the Chicago Sun-Times:
In the wake of the recently passed debt deal, the Chicago Sun-Times asserts, “President Obama’s job is to convince the nation that more tax revenue — not just more spending cuts — must be a part of the two-stage deal” (Obama must find a way to boost U.S. revenue, August 2). However, income taxes aren’t the solution, they are the problem.
Simply raising marginal tax rates will accomplish nothing, since tax revenue as a share of GDP is historically 18-20% regardless. Our lackluster revenue and economic output is due to unemployment, and the best way to foster job growth is by eliminating all income taxes on individuals and businesses. If the US taxes consumption rather than income, a whole new jobs boom will begin instantaneously.
Absent an income tax, businesses will exist in an environment of certainty without the need to seek out loopholes and foreign labor markets. Moreover, corporations will flock to the US, firm in the knowledge that this is the best country to start-up and grow business. As industries realize an influx of new competitors to innovate, countless jobs will be created in the process. Certainty for business translates to stability for individuals and a prosperous society for all.
Furthermore, individuals gaining the freedom to increase their consumption, investment, and savings will result in an additional uptick in economic output. Since the wealthy account for the largest block of consumption, they will indeed pay their “fair share” of taxes. Eliminating the income tax and replacing it with a consumption tax will also remove unfair advantages to politically well-connected individuals, corporations, and special interests – providing a level playing field for all market participants. How does that translate to a “kick in the gut to the middle class”?
Craig D. Schlesinger