Corporate Tax Reform Would Have Made a Strong Jobs Report Much Stronger

Thursday, 03 Jul 2014 08:07 PM

By Larry Kudlow

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Good news for the American worker: Employment in June surged 288,000, with a 262,000 gain in the private sector, easily beating the consensus forecast of 215,000 new payrolls. This marks the fifth consecutive monthly increase of 200,000 or more jobs, the best five-month stretch since early 2006. As for the unemployment rate, it dropped from 6.3 to 6.1 percent.

Stocks surged on the news, with the Dow closing above 17,000 for a record high.

And the good news doesn't end there: The small-business household survey gained a big 407,000 while the number of unemployed fell by 325,000. These job gains were spread wide across the economy, as the diffusion index jumped from 62.9 to 64.8 percent. And although lower-paying retailers counted for a big 40,000 jump, higher-paying professional and business services increased 67,000.

But there were some important glitches in this good-news report.

Editor’s Note: Dow Predicted Will Hit 60,000 — Buy These 4 Stocks Now

For one, worker wages remained soft, rising only 2 percent over the past 12 months. And total hours worked are 2.1 percent ahead of a year ago, suggesting that overall income and nominal GDP are growing at a relatively slow 4 percent rate.

Meanwhile, the U6 unemployment rate, which includes part-time workers who want better full-time jobs or folks who have given up, dropped only slightly to 12.1 percent. That's still a historically high rate. And the labor-force participation rate was unchanged at 62.8 percent, a 30-year low.

Wall Street Journal editor Phil Izzo makes a disconcerting point: The good way for unemployment to fall is for more people to find jobs. But the bad way is for more people to give up looking for work altogether.

Unfortunately, Izzo notes that while 2.15 million people gained employment in June, 2.35 million dropped out of the labor force. "In all but two months since December 2008, more unemployed have dropped out than found jobs," writes Izzo.

So underneath the hood of the strong June jobs report we still find big problems with the U.S. jobs situation.

Representative Kevin Brady, chairman of the congressional Joint Economic Committee, points out that compared to the average of post-1960 recoveries, this one still has a private-sector jobs gap of 5.8 million. To get back on track, the economy needs to add 374,000 private-sector jobs every month through the end of 2016.

This has always been a rather lopsided economic expansion. For example, auto sales surged to 16.9 million in June, a very good number. And the energy sector has been strong for many years. But consumer spending actually fell in April and May. And long-term business investment — a huge job creator — remains in the doldrums.

The latest Business Roundtable survey shows a slowdown in capex spending plans. The National Association for Business Economics predicts only a bit more than 3 percent business-investment growth. And the National Federation of Independent Business (NFIB) says only 24 percent of small-business owners plan capital outlays in the next three to six months.

The paradox is, while companies seem more willing to hire, they are not willing to make long-term investments in the economy. It's not hard to guess that this corporate caution stems in large part from tax and regulatory uncertainties, and frankly, a White House that is anti-business.

A recent Wall Street Journal op-ed by UCLA economics professor Lee Ohanian and Nobelist Edward C. Prescott points to the large decline in the creation of new start-up businesses as a major factor in the lack of business fixed investment.

The authors argue that policies hampering entrepreneurs need to be changed. They point to immigration reform that increases the pool of skilled workers, tax reform that reduces the corporate income tax, and changing Dodd-Frank financial regulations to make it easier and cheaper for small businesses to get loans.

I continue to believe that slashing business tax rates (and ultimately abolishing the corporate tax) would be the single most important economic-growth policy right now. And importantly, small business S-corps must be allowed to take advantage of any lower C-corp tax rate.

A recent study from the Tax Foundation, using a dynamic simulation model, argues that cutting the federal corporate tax rate from 35 to 25 percent would over 10 years raise real GDP by more than 2 percent, increase private business-capital investment by more than 6 percent, boost worker wages by 2 percent, and increase total federal revenues by nearly 1 percent.

I would add to this the need to repatriate U.S. profits lodged overseas, which are taking advantage of lower foreign tax rates. A small penalty rate of 5 percent could bring back $1 trillion.

Let's bring American companies back home. There will be more growth, more investment, more jobs, and much higher wages.

Editor’s Note: Dow Predicted Will Hit 60,000 — Buy These 4 Stocks Now

To find out more about Lawrence Kudlow and read features by other Creators Syndicate writers and cartoonists, visit the Creators Syndicate web page at www.creators.com.

© Creators Syndicate Inc.

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