The United States is experiencing her highest national unemployment rate since the early 1980’s. Back in 1981, in order to stimulate the creation of jobs in the private sector, President Reagan encouraged Congress to pass the Kemp-Roth Job Creation Act. Today, the Obama administration is doing nothing of the sort.
Most Americans are not even aware that, from 1999 through 2009, we had zero growth in private-sector employment. In fact, we lost more than a million private-sector jobs in those years. The only growth in employment was in government jobs.
During that same period, we lost one third of our U.S. manufacturing base—more than 5.5 million American manufacturing jobs have either disappeared or been shipped overseas. That is the logical result of a business tax system that turns the principles of a sound economy upside down.
The “new capitalism” we are living under is a far cry from the free-market system that made our economy so strong. Martin Wolf of the Financial Times (June 19, 2007) described the salient features of this “new capitalism”: “We have . . . the triumph of the global over the local, of the speculator over the manager and the financier over the producer.”
Why should our economy be dominated by Wall Street financial engineers and private-equity moguls rather than Main Street producers?
Today, many economists insist that a weakened U.S. dollar is the only way out of our unsustainable trade deficits, and their advice is being followed. In 2008, for the first time in decades, the Canadian dollar could buy more than the U.S. dollar, and the U.S. dollar was at its lowest value against the euro since that currency came into existence. The decline in our currency continued in 2009, while gold held up strongly against all paper currencies. How long can the dollar maintain its value, given the trillions of dollars in federal debt run up through the Bush-Obama stimulus packages? And who will buy all of our additional paper at today’s low interest rates?
Inflation is running at a much higher rate than the official Consumer Price Index (CPI), which underweights the cost of food, energy, housing, and healthcare in its statistical formula. Real inflation in the United States was running anywhere from seven to ten percent in late 2007. We have only to look at the examples of the German Weimar Republic and Argentina at various stages of her history to see what can happen when a debased currency spirals out of control and loses most of its value: You destroy your middle class and your economy.
The combination of out-of-control government spending and a fatally flawed tax policy is lethal. We cannot expect other nations to continue lending us $2.5 billion a day to keep our economy afloat—especially when they lose money in the process as the dollar declines in value. In this global economy, there are far more stable and attractive options for foreign investors than buying our government paper.
Lenin’s timeless question confronts us: “What is to be done?” How do we put Main Street America back in charge of corporate America? The most honest and prudent approach is as simple as it is difficult: We must rethink the way our government spends our money. And we need to figure out a way to level the playing field with our trading partners and stop the steady loss of good-paying manufacturing jobs to other countries.
The prospect of trillion-dollar trade and budget deficits for the next five to ten years is a dagger aimed at the heart of our way of life. The profligacy of the Bush and Obama years must come to an end. Merely “slowing the rate of growth” will not be sufficient to stop the bleeding of an economy in decline.
The Obama administration is even worse than the Bush administration when it comes to excessive spending, and the Obama stimulus package of nearly $800 billion had next to nothing in it to encourage job creation in the private sector. Government cannot spend its way out of this crisis.
A tax policy concocted by Wall Street financiers, globalists, and an army of special-interest lobbyists has led us to the brink of disaster. The quickest way to reduce our trade deficit and rebuild our manufacturing base is to reform our business tax system along the lines recommended by Austin, Texas, economist David Hartman. Mr. Hartman, the chairman of the Lone Star Foundation, has built a number of successful companies in manufacturing and financial services. Among his proposals for tax reform is an eight-percent consumption tax, which would apply to all imports but not to U.S. exports. (Thus, it is “border-adjusted.”) This “value-added tax” (VAT), he estimates, would replace our current corporate-income tax and reduce the estate tax (the infamous “death tax”), as well as fund a tax credit that would be applied against the employer’s share of FICA taxes.
Such a change in tax policy would make the United States competitive by removing the advantage our trading partners enjoy as a result of the border-adjusted VATs they have put in place to help their domestic companies. This revenue-neutral policy would also be much less of a burden on the U.S. economy than the current tax system. The VAT would allow for the expensing of fixed investment, eliminating double taxation of investment. This would result in an accelerated growth of savings and investment and create private-sector jobs. In the long run, the VAT would bring in a lot more money than the taxes it would replace, because the U.S. economy would grow much faster. We would have a tax system that would encourage companies to create jobs in the United States and keep them here.
The U.S. business tax code, with its high rate of 35 percent, encourages companies to send jobs overseas, move American manufacturing facilities to foreign countries, and take on high levels of debt in order to avoid taxes.
The Hartman proposal would reward U.S.-based businesses for corporate investment and savings in the United States and would end the punitive taxes imposed by our existing system. With this clearheaded, sensible reform, exports would increase significantly, and we would begin to rebuild our manufacturing base and lessen our dependence on foreign energy and imported consumer goods.
As Mr. Hartman points out, since the Industrial Revolution, manufacturing has been the leading source of competitive advantage in terms of income, wealth, and military strength. The restoration and preservation of our manufacturing sector is vital to our national interest. Our manufacturing superiority helped us win World War II and was a key advantage over the Soviet Union during the Cold War.
Hartman’s tax proposal would also cut our soaring trade deficit in half and reinvigorate our middle class.
If the proposal were enacted, American-based businesses would be encouraged to save and invest, and the tax advantages of heavy corporate debt would be gone. That would be good news for American workers, our manufacturing base, and shareholders in U.S. companies. Adopting a border-adjusted value-added tax would reduce the outsourcing of jobs, encourage long-term investment in U.S. companies, and put business owners back in charge of the American economy. And providing businesses with a tax credit, funded from VAT revenues, for the employer’s share of FICA taxes would stimulate job creation in the United States.
Conservatives have long set their sights on the inheritance tax, and for good reason. Reducing or getting rid of the inheritance tax would ensure that successful family businesses could be passed on to the next generation. Our current tax system forces many family businesses onto the auction block. After a taxpayer has paid taxes on all income and assets for a lifetime, inheritance taxation is pure confiscation from the family and lost long-term investment for the country.
Such a change in our economic policy could not come at a more critical time. The American middle class is disappearing. As economist Martin Hutchinson points out,
The declining share of low and moderate income workers in the American pie is undeniable; the relative share of such workers peaked as long ago as 1973. For those with only high school qualifications or less, their absolute earnings peaked in 1973 and have declined substantially since then.
Hutchinson cites a Center for Economic and Policy Research study which “shows that the share of ‘good jobs’ in the US economy has fallen substantially during the 2001-07 business cycle, where a ‘good job’ was defined as one that pays at least $17 an hour (the median wage rate in 1979) and offers employer-provided health insurance and a pension.” Hutchinson calls for a “new intellectual paradigm” to address this “impoverishment of the American middle class.” That is what the Hartman plan represents.
A border-adjusted value-added tax could win broad bipartisan support—as well as support from corporate America and labor unions. Its likely opponents are the foreign nations that currently enjoy a huge trading advantage over us, the Wall Street financiers and private equity funds that benefit from the current tax system, and our domestic socialists who favor high taxes on everyone who has money and on all private businesses. Since all of these special interests have powerful connections in Washington, it will take a concerted, targeted effort to overcome their opposition, but it would be worth the work. The Hartman plan offers us a concrete and achievable means to address immediately the most serious economic threats that we face.
A lot of what we have to do to get America back on the right track is common sense. In addition to having an economic policy that rewards companies for creating and keeping jobs here in the United States, we need to return to a sound dollar policy. Our schools must do a better job of teaching the basics at the elementary and secondary levels. We need to encourage more of our young people to take advantage of the opportunities awaiting them in the skilled trades. And we must restore that strong work ethic which once was an essential feature of the American character. With respect to an increasingly remote federal government, we need to restore federalism—with governmental power closest to the people, wherever possible.
Today, Americans face the most serious set of challenges in my lifetime. Previous generations of Americans have risen to the occasion. We can as well. Indeed, we must, for the sake of our children and grandchildren.
Most Americans sense the seriousness of the moment. Sometimes it takes a crisis to wake us up and get us to do what is necessary to head in the right direction again.
Let’s make the United States the strongest economy in the world again—and put America back to work.