3 Ways Congress Can Boost Growth
The new tax law passed on January 1, before the 112th Congress adjourned, will slow American economic growth because it raised income taxes on most taxpayers.
Newspaper headlines said that couples with taxable income of $450,000 ($400,000 for singles) would pay higher taxes on salaries and capital gains. But, taking account of other levies that come into force in 2013, taxpayers at all levels are affected.
Those making up to $113,700 in wage and salary income are seeing increased payroll taxes.
Those making over $300,000 ($250,000 for singles) in adjusted gross income will be affected by the phaseout of personal exemptions and itemized deductions. These reduce itemized deductions by 3 percent, and personal exemptions by 2 percent, for amounts over the threshold. Taxpayers can lose 80 percent of deductions and exemptions.
Plus, Affordable Care Act tax increases starting at $250,000 of adjusted gross income for couples ($200,000 for singles) also take effect on January 1.
For that reason and others, notably the economy's sluggish 2 percent growth rate, the most important task for the new 113th Congress is to take action to raise growth. The recent rate of hiring, about 150,000 net new jobs a month, appears to be insufficient to make much of a dent in the national unemployment rate, 7.8 percent in December.
Moreover, given the low probability that Congress will make deep cuts in spending, it's only through stronger economic growth and more tax revenues that the government is likely to make significant inroads in the $1 trillion budget deficit.
Here are three ways that Congress can boost our country's growth.
Corporate Tax Reform. It's unlikely that Congress will revisit individual tax reform after the passage of the American Taxpayer Relief Act of 2012. But corporate tax reduction is another story.
It has bipartisan support, from President Obama, House Republicans, and Senate Democrats. House Ways and Means Committee Chairman Dave Camp, (R-MI) would lower the top corporate tax rate to 25 percent. Mr. Obama has proposed lowering it to 28 percent.
Reducing corporate taxes could bring in more investment from abroad, and that would generate additional tax revenue to reduce the budget deficit.
America's corporate tax rates are the highest in the industrial world, which has an average corporate rate of 23 percent. Plus, we are one of seven countries which tax income on a worldwide basis. Other governments tax only profits earned domestically.
Canada, our largest trading partner, has a 15 percent rate, as does Germany. Both tax corporate income generated only within their borders. The United States taxes net income earned abroad, but only when it is "repatriated," or brought back to the United States.
U.S. corporations are holding $1.7 trillion offshore. Some or much of it presumably would be brought home if Congress modified the law.
University of California (Berkeley) professor Laura D'Andrea Tyson, who headed President Clinton's Council of Economic Advisers, estimated in 2011 that a temporary 5 percent rate on repatriated earnings, also included in the Camp plan, would result in $1 trillion of repatriated earnings. After taxes of $36 billion, she estimates that about $950 billion would be distributed to shareholders, or spent for investment.
Additional investment in plant and equipment and additional dividend income for investors would surely impart lift to the U.S. economy.
A 2004 tax holiday, which lowered the tax on repatriated earnings to 5 percent, resulted in $360 billion of $800 billion held offshore returning to America. According to an August 2012 Tax Foundation study, "Following the same ratio, $765 billion could be poised for return under similar conditions."
Of course, all of these projections are uncertain, depending as they do on future financial conditions and scores of decisions by individual companies. But there is reason to believe that the sums brought back to this country would be substantial.
Immigration reform. President Obama says that immigration reform will be a priority of his second term. Let us hope that he and the Congress act accordingly.
The government should make it easier for foreigners who want to work, the highly skilled and those with modest skills, to come to America legally. We are turning away too many highly qualified workers even as we are concerned about our international competitiveness.
In addition, our stringent visa requirements are discouraging tourists who contribute to economic growth simply by what they spend while visiting.
In sum, we must adopt a more flexible system that lets more potential workers enter the country legally. Lamentably, only 13 percent of green cards authorizing permanent residence-and a path to citizenship-are granted for employment purposes. Most of the rest are issued to reunited families and to give political asylum.
In many countries, the wait for American green cards can stretch for over a decade. Since green cards bring in few workers-139,339 in 2011-- most skilled workers use temporary visas to enter. When those visas expire, they must go home or remain here illegally. More legal visas are also needed for unskilled workers, especially in the agricultural sector.
Immigrants also are entrepreneurial. They have a higher propensity to start businesses than do native-born Americans, according to a 2012 study by the Kauffman Foundation, which champions entrepreneurship. It reported that immigrant founders of U.S. businesses started between 2006 and 2012 employed approximately 560,000 workers and generated $63 billion in sales in 2012. In California's high-tech Silicon Valley, 44 percent of businesses had at least one immigrant founder.
Applying market economics, economists Pia Orrenius of the Dallas Federal Reserve Bank and University of Chicago Nobel prize winner Gary Becker have proposed that the government auction off work permits to employers, or visas to individuals. The money raised could be used to reduce the budget deficit, or it might be distributed to those parts of the country with the highest concentration of immigrants.
Regulatory Reform and Oversight. In January 2011, President Obama issued an executive order calling on cabinet agencies "to use the best available techniques to quantify anticipated present and future benefits and costs [of regulation] as accurately as possible." He extended the directive to independent agencies in July 2011.
But reality has been more than a little different. For example, the Environmental Protection Agency issued costly mercury and carbon regulations on the basis of weak cost-benefit analysis.
The year 2013 is set for a deluge of new regulations, ranging from Environmental Protection Agency standards for hydraulic fracturing in the production of oil and gas from shale, to new Dodd-Frank Act regulations from the Consumer Financial Protection Board. These regulations could reduce U.S. competitiveness.
One example of congressional efforts to rein in costly regulations was Texas Representative Lamar Smith's Regulatory Accountability Act of 2011, whose companion Senate bill was sponsored by a fellow Republican, Ohio Senator Rob Portman. Smith's bill passed the House of Representatives in the 112th Congress by 253-167, but was not considered by the Democratic-controlled Senate.
The bill would require more transparency and cost-benefit scrutiny of the rules that would add most to business costs, and would also require agencies to adopt the least costly option.
Realistically, this Republican bill is unlikely to be enacted in 2013. However, the House of Representatives oversight committee and subcommittees could hold hearings to make sure that cabinet agencies issue cost-effective regulations. Congress can hold up executive branch funding if it is dissatisfied with regulations.
Reform of corporate tax laws, immigration, and regulations might help the U.S. economy in 2013. How about something pro-growth from Congress for a change?