Steve Forbes: Bottom line on election-year taxes
Apr 18, 2012 | Posted by Team Cantor
By: Steve Forbes
April 17, 2012 09:24 PM EDT
As millions of Americans held their nose on tax day and sent their money to Washington, the House and the Senate were also focused on taxes. The Senate couldn’t muster enough support Monday to consider the “Buffett rule,” a new minimum tax rule that seems to be President Barack Obama’s top fiscal priority — if not distraction. It wouldn’t create a single job or help a single business. It’s divisive, and not worthy of being a part of a serious national conversation.
The House is due to vote Thursday on Eric Cantor’s Small Business Tax Cut Act, designed to help small businessmen and businesswomen with fewer than 500 employees expand and hire workers. To measure its impact and value, we must take a macro view of where the economy stands with consideration of election-year politics.
Real economic growth has been pathetic during the Obama presidency. Last year, the economy grew just 1.7 percent. By comparison, the Reagan recovery was spectacular — growing at 4.5 percent in 1983, with nearly 3.5 million jobs.
In just one month, September 1983, the Reagan economy added more than a million jobs, nearly as many as the economy grew for all 2011.
To match the amount of jobs created in the fourth year of the Reagan presidency, 1984, Obama’s economy would have to create 370,000 jobs per month for the rest of the year. Americans shouldn’t accept any less.
What is holding back growth? For one, the current Tax Code is a massive roadblock. It stifles the American dream by restricting people with complexity and unnecessarily high tax rates. It prevents true innovation and business startups.
The code, coupled with the highest corporate tax rate among industrialized nations, penalizes businesses and plagues workers and other citizens. It holds back our small-business job engines.
There is a growing momentum in the nation to simplify the Tax Code. Even the president’s Simpson-Bowles commission recommended removing loopholes and reducing rates across the board. The best solution would be the flat tax, which has been adopted successfully by more than 20 countries.
But in Washington, the momentum is still lacking. One divide that only the election will solve is the issue of taxes. One side wants to penalize success through higher taxes, the other wants to restore the supply-side, incentive-based model of economic growth through simpler and lower taxes for all. When it comes to the choice of raising taxes or lowering them, there is no middle ground.
Real tax reform is absolutely necessary, and elected officials like House Ways and Means Committee Chairman Dave Camp (R-Mich.) and House Budget Chairman Paul Ryan (R-Wis.) are working tirelessly to try to bridge the gap and make it happen. Even they concede, however, that in a divisive election year, comprehensive tax reform is not likely.
Why is this important? At the end of this year, there will be a convergence of events akin to an economic tsunami. The current tax rates are set to go up, the temporary payroll tax cut will expire, “Obamacare” taxes on capital are to kick in and the alternative minimum tax will most likely hammer tens of millions of middle-income Americans. These events could knock the economy into a tailspin.
In an election year, can anything be done in a fractured Washington to help prepare for what’s to come? While comprehensive changes are hard to reach now, incremental progress can be achieved.
Where can common ground be found? A good place to start is the shared belief that taxes are too high on small businesses and the recognition that they will get much higher at the end of this year. Which brings us to the 20 percent Small Business Tax Cut.
Under Cantor’s plan, small businesses could deduct 20 percent of their income from taxes and as much as 50 percent of their W-2 wages. In other words, whether set up as a corporation or one of the 75 percent of small businesses that operate as a pass-through, small businessmen and businesswomen can reap the benefits of the legislation. This can immediately free up funds for small businesses to retain and hire workers.
Cantor’s tax plan could ultimately create more than an average of 100,000 jobs per year, yield $112 billion more in gross domestic product and lead to a 2.24 percent increase in business capital, according the new Fiscal Associates study released Monday by the YG Network.
And what about workers? The legislation would help middle-class workers even more than business owners, according to that same study. They would receive more than two-thirds of the added private-sector benefits and the return to middle-class citizens would be $4.30 for every $1 of actual government revenue loss. One-third the firms that benefit from the Cantor plan are owned by women and one-fifth by minorities.
The president has spent much of his first three years pushing for massive government stimulus spending, tax hikes and now class warfare. He has pulled from the Keynesian playbook repeatedly — but hasn’t been able to produce a winning formula for real economic growth. Cantor’s plan signifies a return to the supply-side incentive model for growth. It lets millions of small businessmen and businesswomen keep more of their own money to invest, hire more workers and expand.
There is enough in this plan for both parties to be able to support.
This measure, however, should not be confused with the need for fundamental tax reform to help make the United States more competitive. While that effort continues, the economic tornado facing America in December moves closer.
Consider this a weather report. And until fundamental reform can be achieved, Congress and the president would be wise to take incremental precautionary measures like the Cantor plan to expand the economy and create jobs.
Steve Forbes is chairman of Forbes Media and author of “How Capitalism Will Save Us.”