For Jobs, Cut the Corporate Tax Rate

As we wait for President Obama’s big “jobs” speech tonight, here are a few thoughts.

The way to think about jobs is to think first about investment. Workers are expensive, so businesses don’t hire them willy nilly. Instead, businesses seeking new markets build factories and buy machines. Then they hire the number of workers they need to run the new machines and maximize their profits.

If President Obama wants more hiring, he should make it more profitable for businesses to invest in the United States. The simplest and most direct way to do that would be to chop America’s uniquely high corporate tax rate of 40 percent, which includes the 35 percent federal rate and the average state rate. That reform could be combined with cuts to federal spending—such as business subsidies–so as not to increase the deficit.

A corporate rate cut makes political sense for Obama because it would be both pro-business and pro-labor. The nonpartisan Joint Committee on Taxation ran two macroeconomic models in 2005 and found that a corporate rate cut would “provide incentives for increased investment in corporate capital. Over time, this increased investment results in more goods and services and higher total output. It also results in higher labor productivity, leading to increased wages and employment.”

How big a rate cut do we need? According to KPMG, the global average corporate tax rate fell over the last decade from 32 percent to just 25 percent. Thus, cutting our rate by at least 15 percentage points would match the global average, and it would be bold stroke by Obama to get the economy booming again before the upcoming election