Will Kerry Economic Plan Be Harmful Or Merely Useless?

Investor's Business Daily

John Kerry has 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 taxwise. 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.

Exports For Growth

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.

Won't Work

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 them is not going to create more jobs here, but more likely will reduce their exports and the employment they support.

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 ineffective.

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 Labor Department 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 ("The Use of Tax Subsidies for Employment") 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 Labor Department'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."

Can't Be Serious

The Labor Department study concluded that 92% of those workers for whom the tax credit was claimed would have been hired anyway, and that the program cost three times more than it returned in benefits.

In conclusion, it appears that Kerry has chosen as his centerpiece jobs program two initiatives 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.