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Obama Should Take a Tax Policy Hint from Europe on Jobs and Economic Growth

4 min readBy: Scott Hodge

This op-ed was published in the Oregon Statesman Journal on December 15, 2009.

President Obama has now held a job forum in Washington, started a Main Street Tour through cities around the country, all devoted to getting feedback from CEOs, small business owners and financial experts on how to create jobs.

His first stop was Allentown, Pennsylvania, where corporate taxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. es are the highest in the developed world: 35% federal and 9.99% state. But tax rates never got a mention.

Instead the President heard what he had arranged to hear: that a second stimulus bill loaded with job credits and more spending would bring the economy around, especially if the job credits are for so-called “green” jobs. He also wants to extend unemployment insurance again and add health care for the jobless, give more emergency aid to states and cities, and also provide aid to senior citizens.

Among these proposals, the job credit idea is the only one that even pretends to create jobs. If it passes, the government will pay companies some amount toward each new hire. Obama has mentioned $3,000 in the past. Job credits are common at the state level, and they’ve never worked well. The president’s men know this, so they are actually gambling that the economy has turned the corner, and no matter how ineffective job credits are, they will look good if the economy is on the way up anyway.

Instead of focusing on short-term job creation, the President and Congress should be laying the groundwork for long-term growth. If he demanded an answer from candid CEOs, small business owners and financial experts, here’s what they’d tell him.

The CEO could truthfully tell the president, “Mr. President, high U.S. business taxes – federal and state – make every country on earth look like a corporate tax haven by comparison with U.S. tax rates. And the U.S. taxes our foreign profits while other nations let their companies earn profits abroad tax-free. We need some relief if we’re going to grow and create jobs.”

The small business owner—who pays her business taxes on her personal 1040 form—could candidly tell the president that she worries about the coming higher income tax rates. “Mr. President, I’m already paying a 35 percent top tax rate, plus Medicare and state taxes, not to mention property taxes and several others. If all three of the big tax hikes Congress is planning are enacted—the income tax hike of 4.6 percent, the health care surtaxA surtax is an additional tax levied on top of an already existing business or individual tax and can have a flat or progressive rate structure. Surtaxes are typically enacted to fund a specific program or initiative, whereas revenue from broader-based taxes, like the individual income tax, typically cover a multitude of programs and services. of 5.4 percent, and the war surtax—entrepreneurs like me could face tax rates of 60 percent. I can’t be hiring people with such an uncertain tax climate.”

The financial expert could honestly explain how high our taxes on dividends are. “Mr. President, the U.S. now has the 3rd highest total tax on dividends among OECD nations. Just five years ago, our rate was 8th highest. If the House health reform plan passes, our dividend tax will be the world’s highest in 2011.”

These statistics should worry the president and his economic team as they consider policies for growing the economy over the long term. The very taxes that the U.S. ranks worst in are the most harmful for long-term economic growth according to the study “Tax and Economic Growth,” published in July 2008 by economists at the OECD.

Sometimes criticized for leaning left, the OECD nevertheless publishes a report that flies in the face of every Obama tax policy. No administration in memory has shown as much hostility toward business and high-income individuals as has Obama’s.

Sweden, of all places, cut its personal income tax rates this year to encourage people to enter the workforce. And, over the past two years, more than 50 nations – including China, Great Britain and Germany – have cut their corporate income taxA corporate income tax (CIT) is levied by federal and state governments on business profits. Many companies are not subject to the CIT because they are taxed as pass-through businesses, with income reportable under the individual income tax. es in order to maintain their global competitiveness. Many of these countries have pleasantly discovered that lower tax rates reduce the incentive for businesses and individuals to engage in income-shifting which means more taxable incomeTaxable income is the amount of income subject to tax, after deductions and exemptions. For both individuals and corporations, taxable income differs from—and is less than—gross income. stays in-country.

For the sake of the long-term health of the nation, the President may have to set aside his ideological beliefs for a new set of practical solutions that are working in other nations.

Hodge is president of the Tax Foundation, a non-partisan tax policy research organization in Washington, DC.