Fletcher: US needs to change tax structure
There are two main methods of regulating money and interest rates – monetary policy and fiscal policy. Each performs a specific role in helping shape our country’s economy.
Monetary policy is what the Federal Reserve Board does through the manipulation of interest rates by the buying and selling of government bonds and the mandating of certain interest rates.
Fiscal policy is primarily made up of tax policy and is the responsibility of the U.S. Congress.
In very general terms monetary policy is what is used to tweak the economy while fiscal policy is the heavy hitter.
The U.S. and many other nations have been using monetary policy almost exclusively over the last six years to work the world economies out of what has been called the “Great Recession.” Since the recession has lasted six years, I suggest the approach hasn’t been too effective.
France is about the only nation that comes to mind that has tried fiscal policy. Unfortunately, it tackled the issue the wrong way. The French raised taxes, believing their government could pull the country out of its economic decline via new spending. The approach ignored the fact governmental spending, from an economic standpoint, is just income transfer and cannot in itself build wealth for a nation.
Reducing taxes, which now is under consideration there, has been proven in the United States under Presidents Kennedy and Reagan to effectively stimulate the economy.
Intensified rhetoric over class divisions in the United States today effectively renders fiscal policy out of the question as an effective economic tool for economists. The Federal Reserve Board is allegedly independent of politics, yet its chairman is appointed by the president and thus, one can surmise, represents his economic persuasions. Fiscal policy and taxes are the province of Congress. The two represent all that is beautiful in a division of power that our forefathers saw as important with the U.S. Constitution and Bill of Rights.
This seemed like a good division of powers then and it seems to me to be an excellent balance today.
The problem arises with the rhetoric of federal officials who stir the class division debate and parade businesses before them in special hearings to ensure they are paying their fair share of taxes.
To date, all the companies that have been subpoenaed have passed muster and are in compliance with U.S. tax laws. However, certain congressmen and senators still vilify these large employers because they are successful. The legislators turn public opinion against tax based incentives, thereby crippling any chance of using fiscal policy for economic stimulation.
The president isn’t much better and he, also, is very critical lately of those who have been successful in business. Without wealth as an incentive for us, where is the drive to push our country forward? Bill Gates and Warren Buffet didn’t come from great wealth but they have undisputedly had great economic success. As a result, each employs thousands of people.
Unfortunately, this rhetoric and current U.S. economic policies are driving many profitable companies elsewhere. The Wall Street Journal and others report many large companies are stashing money overseas because the tax system makes it cheaper for them to invest their off shore earnings. The very wealthy are doing so as well as tax laws in the U.S. are ever changing for them.
The problem is that if wealthy individuals and multinational corporations start to invest overseas as a result of our tax laws, then that money is no longer available for investment here.
Cash in other countries hurts the least economically fortunate of our citizens the most. If we want American corporations to bring their overseas deposits (which already have been taxed by the countries in which they earned it) home, then don’t tax it twice. The U.S. is one of very few countries that taxes earnings made in another country.
If you want more corporate investment here than overseas by U.S.-based companies, then lower the corporate tax rate to the same rate as competitor nations. Our tax rate for corporations is more than three times the rate of Ireland’s. If you don’t want rich entrepreneurs to move to Singapore, then keep in mind that Singapore doesn’t have personal income tax.
Our government seems to be chasing earnings, investments and jobs elsewhere. The U.S. Constitution promises equality of opportunity for all. I wonder whether those in D.C. want the same?