Why Is U.S. Economic Growth So Disappointing? | Commentary

Posted June 8, 2015 at 11:58am

The pile of bad news about the state of the U.S. economy is getting bigger, not smaller, and that’s a problem for all Americans. We might consider these recent news items:

First, the stark May 29 headline in The Wall Street Journal: “U.S. GDP Fell 0.7% in First Quarter.” That’s right: According to government data, the U.S. economy shrank at an annualized pace of 0.7 percent in the first three months of 2015. That’s just one quarter, to be sure, but it’s not good.

Second, here’s how a Gallup poll summarizes U.S. economic performance in its latest finding, covering public confidence in the economy as of May 24: “No Improvement in U.S. Economic Confidence Index, Now at -9.” That is, public sentiment on the economy is 9 points below zero. As Gallup observes, “The index has been in negative territory for all but one of the past 14 weekly readings.”

Third, on May 28, the Wall Street firm Goldman Sachs cut its estimate of the future growth rate of the economy from 2.25 percent per year to 1.75 percent per year. If correct, that reduced estimate from Goldman Sachs would spell a reduction in our economic future by more than one-fifth.

And of course, there’s plenty of other data that underscores these bearish findings. So, we might ask: In such an economic climate, what are the prospects for the besieged American middle class?

As the co-chairmen of the Reforming America’s Taxes Equitably Coalition, a bipartisan group of 34 companies and trade associations, we have long believed one powerful solution to the “middle-class squeeze” sits well within our reach. America should cut its counterproductively high corporate income tax rate as part of an overall tax-reform package.

Today, the U.S. federal corporate income tax rate is 35 percent. And yet, as the nonpartisan Tax Foundation notes, corporations headquartered in the 33 other industrialized countries that make up the Organization for Economic Cooperation and Development — the “club” of affluent nations with which the U.S. competes for investment and jobs — face an average corporate tax rate of 25 percent. To put things another way, all of our competitors have a lower corporate tax rate.

At first glance, that 10-point differential in tax liabilities might seem small, but in fact, the difference between 35 percent and 25 percent makes a huge difference in investor calculations as to the value of a company, and thus how much it can invest, borrow — and hire.

And while it can be argued that not every American corporation pays that high U.S. rate, many do. And for those corporations that do not, there’s the question of what they have had to do in order to avoid the American tax bill and its high rate — the tactics of tax avoidance. What they have to figure out is some way to get their income taxed at a lower foreign rate. And that means, often, having their income not tallied in the U.S. at all.

The clever tax strategy known as the “Double Irish,” for example, builds on the fact that Ireland’s corporate tax rate is just 12.5 percent. In other words, if a big U.S. company can hire enough accountants and lawyers to get its profits counted as “Irish,” as opposed to “American,” then its tax liability falls by nearly two-thirds (the difference between 35 percent and 12.5 percent). And “tax inversions,” in which American companies take advantage, for example, of Canada’s 15 percent rate to become “Canadian,” are another symptom of the problems that come when U.S. companies seek to avoid our high tax rate.

It quickly becomes apparent that this systematic tax avoidance is having a serious effect on investment choices. The most effective way to avoid the U.S. tax rate is to not have revenues in the U.S. — and that is affecting U.S. economic growth. And if companies are paying most of their attention to the U.S. tax code, and how to beat it, then of course they are doing less to expand, and hire, within our borders.

And as companies seek relief by moving economic activity offshore, they are diminishing the job prospects of ordinary Americans, just as the current economic-growth statistics are showing. The member companies of the RATE Coalition are fighting to keep those jobs and incomes here in the U.S.

Elaine C. Kamarck and James P. Pinkerton are co-chairmen of the RATE Coalition.