Why Taxes Matter -- The Perfect Government Stimulus Plan

I work for a large international manufacturing company (one of the largest in the world) with manufacturing plants across the globe. In 2008, an unexpected Brazilian tax law revision changed the tax rate on a product we manufacture in Brazil from 8% to 20%. In 2009 a project is being executed to move production of that product out of Brazil.

I give this example to demonstrate the impact of government rules and laws on business, and how quickly businesses react. In the example above, the project to move the production location was actually started in 2008, the same year the tax law was changed. Taxes are not just a nuisance with which businesses must deal -- they drive decisions. In this real-life example, the Brazilian government's tax increase has led directly to job losses. Politicians take note.

The opposite can also be true. Businesses don't just react to raised tax rates. They also react to lowered tax rates.

If the US government is serious about stimulating the economy and creating real, long-term job growth, the solution is simple: lower corporate and business taxes. Based on the latest pork-filled "stimulus" bill, I fear that the government is not serious about stimulating the economy. They are more concerned with petty politics. However, that's a subject for another day. Getting back to the subject at hand...

Surprisingly, to the credit of the main-stream media, it's been well publicized that the United States has the second highest corporate tax rate in the industrialized world. Only Japan has a higher rate (see chart). It should be noted that Japan is just now starting to come out of a decade long recession.

Remember my example above -- businesses react to tax changes. Imagine the stimulation to the economy if the United States were to lower their corporate and business (taxes on manufactured goods need to be considered as well as corporate tax rates) tax rate to be the second lowest instead of the second highest. Even better, what do you suppose would happen if the United States eliminated the corporate tax altogether. Businesses would flock here to set up shop! Businesses want to do work in the US already. The US has the best educated, most productive work force in the world, but as it stands now the financial numbers don't add up. The movement to the US would be quick and dramatic if the government could set up the proper tax incentives.

What would be the impact of corporations moving business to the US? Jobs. Production. Income. Wealth. Instead of exporting jobs, the US would import jobs. In addition to the incentive for non-US companies to set up shop in the US, the benefit to companies already in the United States would be enormous. Imagine the programs corporations would tee up with a new-found store of cash. In the small division of the company I work for, we have several proposals for new product introductions that can not be started at this time. That would change immediately if tax reductions were made to free up cash. Projects that have been on the back burner would immediately be green-lighted. Instead of a disadvantage, US companies would have a distinct advantage on the global stage. This would drive innovation and growth.

The cash freed up as a result of a significant corporate tax rate cut would give the short-term injection the economy needs now. The job creation from international businesses setting up shop in the US would provide the long-term boost to sustain the economy.

Of course, this plan would cause the government to lose significant tax revenue. The government is now trying to spend somewhere in the neighborhood of a trillion dollars on a stimulus package with dubious potential for job creation. You tell me which approach would be a better way to spend a trillion dollars.

Some people have a knee-jerk opposition to lowering taxes on businesses, especially larger corporations. This is plain foolishness. These people suffer from class envy, as they mistakenly think corporations represent rich "fat cats". Quite the opposite is true. Successful businesses are the foundation of a healthy middle class.

So far, the government has considered no other ideas except excessive pork spending. A truly bold and effective economic stimulus plan would include dramatic corporate and business tax reduction.