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SkeeryKerry's Useless and Harmful Economic Plan

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  • gmd10ms
    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
    Message 1 of 1 , Apr 1, 2004
      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
      to do.

      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.
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