Kerry's tax plan may not be solution for creating jobs
by Caroline Baum
February 26, 2004
It's one thing to admit Kerry's specific proposals take a back seat to beating President George W. Bush in November. It's another not to have specific proposals.
For example, jobs are a high priority for Kerry. How he proposes to create them is a mystery. The senator is offering up the seemingly incongruous initiatives of raising taxes and creating jobs.
"When I am president, we will put jobs back on the top of the national agenda and return prosperity to America," Kerry Feb. 16 told a town hall meeting in Wausau, Wis. "I will start by repealing the Bush tax cuts for the wealthiest Americans and instead invest in education and affordable health care for all."
How exactly would Kerry's job-creation campaign, which begins by repealing the Bush tax cuts for Americans earning more than $200,000 a year, work?
"A tax increase in the short run acts as a near-term drag on aggregate demand and slows the rate of increase in jobs," said Chris Varvares, president of Macroeconomic Advisers, a St. Louis-based consulting firm.
In the long run, Varvares said, "it may be the right thing to do in the face of large fiscal deficits and a reduction in national saving, which ultimately will raise real rates, retard investment and reduce capital formation and our standard of living."
The Kerry plan provides no timeline for creating jobs - and even fewer details on which tax cuts he wants to roll back.
Material provided by the Kerry campaign says he supports "sensible tax cuts for the middle class, such as repealing the marriage penalty, keeping the child tax credit, tax relief for small businesses and providing a payroll tax holiday."
Kerry has been mum on what he'd do about the reduction in the top tax rate on dividends and capital gains to 15 percent last year. Does he want to raise all taxes for those earning over $200,000, or just marginal tax rates from the current 35 percent back to 39.6 percent?
Assuming all the taxes on top wage earners revert to 2001 levels, it would mean an increase in the top tax rate of 13.1 percent on income, 33 percent on capital gains and 164 percent on dividends, according to Michael Darda, chief economist at MKM Partners in Greenwich, Connecticut.
Lowering the return on work and investing means less of both and slower economic growth.
Kerry supports some targeted initiatives to prevent manufacturing jobs from leaving the United States (a lower corporate tax bracket for domestic manufacturing operations) and to create new ones (a two-year payroll tax credit for new hires).
Jerry Jasinowski, president of the National Association of Manufacturers, said proposals to stanch the flow of jobs overseas were "foolhardy." A more productive avenue would be to address the "impediments to U.S. competitiveness," including health care costs, government and environmental regulation and corporate governance," Jasinowski said at the National Manufacturing Week conference in Chicago.
Manufacturing has always chased the cheapest source of labor. Subsidies may delay the process of outsourcing jobs overseas; they won't prevent it.
That won't stop politicians from trying. The temptation to tinker with market forces to produce short-term results for the election cycle is just too great.
Caroline Baum is a columnist for Bloomberg News.
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