Policy

America's Self-Inflicted Economic Wounds

The country may be limping along, but we did it to ourselves.

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Jobs
Old Sarge / Foter / CC BY-NC

As of last month, to go by the polls, half of Americans consider the country to still be in recession. Even more expect their kids' generation to have to scrap harder than their parents to get by. Little did those poll respondents know that, even as they voiced their worries, job creation had taken a dip, with only 142,000 nonfarm slots created in August, compared to 212,000 in previous months.

Another poll in September found similar economic gloom. That's hardly a shocker when the proportion of the population working or looking for work is at its lowest level since 1978. Some of those sharing their pessimism with the pollsters may be among the ranks of young college graduates for whom the underemployment rate has risen from from 9.6 percent in 2007 to 16.8 percent in 2014. Gloom comes with the territory.

No, it's not the Great Depression—technically, we're in the midst of an economic recovery. But it's a lousy recovery, and one that most people find unconvincing as hell. Whatever else the sort-of recovery, not really recession may be, it's strong evidence of self-inflicted economic wounds. America may be limping along, but we did it to ourselves.

Fat Cat
White House

The White House and its allies tried to make hay over the summer with terrible tales of "corporate deserters" who are, as the president put it, "fleeing the country to get out of paying taxes."

But those formerly American companies setting up shop in Ireland, Canada and elsewhere weren't jumping—they were pushed.

The accounting firm KPMG points out that the United States' corporate income tax rate is roughly 40 percent. That compares to 26.5 percent in Canada, 21 percent in the United Kingdom, and 12.5 percent for new operations in Ireland, rising to 25 percent for other business activities. Only the United Arab Emirates has a higher rate.

Not only is the U.S. corporate tax rate high, but a 2013 paper from the International Monetary Fund points out that "All G-7 countries other than the United States have now adopted territorial taxation (or a partial version thereof) for active business income." The U.S. is the last major country inflicting worldwide taxation "under which corporations deemed 'resident' in a country are taxable by that country on their income from all over the world…" Everybody else settles for a piece of the action within their borders.

Their whining aside, you'd almost think American lawmakers were working for the Irish Chamber of Commerce.

Businesses also have to run a bureaucratic gauntlet to stay on the good side of tax collectors in the U.S. The consulting firm PricewaterhouseCoopers ranks the U.S. at 64 out of 189 countries for ease of paying business taxes, with a total tax rate of 46.3 percent, and 175 hours required to comply, with an average of 11 payments per year.

Canada, our friendly neighbor to the north, comes in at #8, with a total tax rate of 24.3 percent, 131 hours to comply, and eight payments. Ireland, where several U.S. firms recently relocated their headquarters, comes in at #6, with a total tax rate of 25.7 percent, and 80 hours required to comply with an average of nine payments.

So, paying business taxes in the U.S. is an expensive ordeal. Could it be… Could it be that making the country a relatively unattractive place within which to locate a business might slow down the creation of jobs and prosperity?

And it's not just evil corporations. The U.S. government stands out among world governments for trying to tax its citizens even when they live far from American shores and may have no intention of returning home. Efforts to collect have become sufficiently expensive and intrusive, including the Foreign Account Tax Compliant Act of 2010 (FATCA), that growing numbers of Americans dump their citizenship just to get free of the IRS.

Consider that prospect through the eyes of a foreign-based entrepreneur trying to decide where to settle, invest, and build something new.

Just days ago, the Tax Foundation released the International Tax Competitiveness Index, placing the U.S. at 32 out of 34 OECD countries (only Portugal and France scored lower). Once again, the U.S. was slammed for its treatment of business, but the country was also called out for "individual taxes with a high top marginal tax rate and the double taxation of capital gains and dividend income," as well as poorly structured property and estate taxes.

OK, we all have our tax headaches. Yeah, it sucks that the U.S. is losing ground to other countries that actually try to make their tax systems tolerable. But we've suffered under the IRS for decades; it's not going to sink us now.

Well, not by itself it won't.

College grads

Among the things that Americans worry about that aren't called "economy" is the Affordable Care Act. We've never much liked Obamacare and polls find that we keep not liking it. People might like it even less if they knew that it probably plays a large role in pushing those underemployed recent college grads to battle for part-time jobs flipping burgers.

As part of its latest monthly survey of service sector businesses in Texas, the Federal Reserve Bank of Dallas included specific questions about the impact of the Affordable Care Act. The vast majority reported increased costs from the law for 2014 and even more saw higher costs next year.

But those are just fat-cat executives. Who cares about them? What does that mean for the working folks supposedly benefiting from the law?

Well… 20.8 percent of those Texas fat cats say the number of people they employ will be lower as a result of the Affordable Care Act (2.7 percent say it will be higher). And 22.4 percent say they'll use a higher proportion of cost-reducing part-time, contract, or temporary workers (7.1 percent will use fewer). Some businesses are reducing wages and benefits, too—certainly more than are increasing them.

Similar hits to employment are reported among businesses surveyed by Federal Reserve Banks in Philadelphia, New York, and Atlanta.

The New York Federal Reserve Bank separately surveyed manufacturers and business leaders around the Empire State. Surveys said:

About 20 percent of respondents in both surveys said that they were reducing the number of workers and/or raising the share of part-time workers. A similar proportion said they were paying less compensation per worker because of the ACA, and a similar proportion of manufacturers said they were outsourcing more work.

Those figures are virtually identical to those drawn from Texas, thousands of miles away. Increased costs from a law peddled as an aid to the American people are resulting in fewer jobs, and a higher proportion of part-time gigs that offer few if any benefits.

Americans have reason to feel gloomy about the economy. But that pall hanging over their paychecks and bank accounts isn't a natural disaster—it's a series of injuries inflicted on the American economy by the officials they elected to office.