SkeeryKerry's Useless and Harmful Economic Plan
- March 31, 2004, 7:49 a.m.
Kerry's Useless Economic Plan
At best it will do nothing at worst it will be positively harmful.
Last Friday, John Kerry unveiled his long-awaited economic plan, one
that he says will create 10 million new jobs in the U.S. It's an
extraordinarily unambitious plan, one that relies primarily on two
tax gimmicks of dubious value. One would penalize U.S. companies with
foreign operations to pay for a cut in the corporate tax rate. The
other would revive a discredited job subsidy plan that has been tried
before and failed.
There are many problems with Kerry's plan to tax the unrepatriated
overseas profits of U.S. companies. The main one is that few other
countries tax the foreign profits of their companies at all.
Consequently, U.S. firms are already at a competitive disadvantage
tax-wise. Kerry's plan would make the situation worse, encouraging
U.S. companies to reincorporate in other countries.
As far as jobs are concerned, the Kerry plan probably would reduce
employment in the U.S. That is because a very considerable amount of
exports go from U.S. businesses to their foreign affiliates. And,
contrary to Kerry's implication, the bulk of earnings on sales by
foreign affiliates are repatriated to the U.S. annually, thereby
offsetting a significant portion of the trade deficit.
According to the Commerce Department, in 2001 (latest year
available), U.S. companies exported just over $1 trillion worth of
goods and services. Of this, $230 billion went to their foreign
subsidiaries. In addition, U.S. companies earned $124 billion in
profits on their foreign operations. In effect, the trade deficit is
reduced by this amount.
When the operations of U.S. affiliates of foreign companies are
netted out, the Commerce Department found that the trade deficit was
reduced from $358 billion to $251 billion in 2001 by the operations
of the foreign subsidiaries of U.S. companies.
These are important factors because exports add to U.S. economic
growth while imports reduce it. Also, U.S. multinational companies
are a major presence in the domestic economy, with internal sales of
$2 trillion in 2001 and employment of more than 23 million Americans.
Kerry is simply making them scapegoats for slow employment growth in
the U.S. that they have nothing to do with. Imposing tax penalties on
these companies is not going to create more jobs here, but more
likely will reduce their exports and the employment it supports.
Kerry's other bright idea is a new jobs tax credit, which would
reward companies for increasing employment over some base period.
This was also one of Jimmy Carter's bright ideas, but it never
worked. Although Kerry cites one academic paper in 1979 that found
modest positive results from Carter's program, he fails to note a
much larger body of research that found the program to be totally
One of the first serious studies of the Carter program was done by
the U.S. General Accounting Office in 1981 for Sen. John Heinz (R.,
Pa.), late husband of John Kerry's wife. It found that there were
severe problems in identifying new jobs. At any given time, some
companies are adding jobs and others losing jobs. The Department of
Labor estimates that about 2.5 million jobs are created each month
and a little less than that are destroyed.
Thus companies were often rewarded for doing what they would have
done anyway. This fact was documented in further GAO reports in 1983
and 1991, which found that half of companies claiming the jobs tax
credit did so retroactively after they had already hired a
qualified worker. Therefore, they were simply rewarded for adding
jobs they would have added anyway without the credit.
A May 1986 joint report by the Treasury and Labor Departments (ìThe
Use of Tax Subsidies for Employmentî) found that the impact of the
jobs tax credit "fell short of Congressional intentions." It was
claimed by "only a fraction of eligible hires." And it may have been
hampered by being administered through the tax system, as Kerry wants
However, the most devastating study was done by the Clinton
administration in 1994. The Department of Labor's Inspector General
found that the jobs tax credit "was not an effective means of helping
target group members find employment." It "did not induce employers
to hire members of target groups they might not otherwise have
offered jobs." The program "largely subsidizes the wages of those who
are hired irrespective of their eligibility and the availability of
the tax credit."
The Labor Department study concluded that 92 percent of those workers
for whom the tax credit was claimed would have been hired anyway, and
that the program cost 3 times more than it returned in benefits.
In conclusion, it appears that Kerry has chosen two initiatives to
centerpiece his jobs program that will be ineffective at best and
positively harmful at worst. No serious economist thinks they will
create anywhere close to 10 million jobs, as Kerry claims.
Bruce Bartlett is senior fellow for the National Center for Policy
Analysis. Write to him here.
# # #