If You Really Want To Make U.S. Companies More Competitive...

By Lawrence Kudlow
Friday, May 18, 2007

There’s a big hullabaloo in Washington about making America more “competitive.” Much of the hubbub centers around President Bush’s powerful Treasury man, Henry Paulson, who has been busy holding conferences and writing op-eds on the subject.

Competitiveness is a noble venture. But the problem I have with the current campaign is that it’s limited to accounting.

Undoubtedly, more transparent auditing, better financial reporting, and streamlined accounting standards to encourage international companies to list on U.S. exchanges are all good things. And of course, Sarbanes-Oxley is an onerous piece of regulatory overreach -- it throws red tape and huge costs at a problem that could have been easily remedied with the stronger enforcement of existing laws. Sarbox reform is in order.

But there’s plenty missing from this competitiveness calculation. To begin, the U.S. is actually doing quite a lot right.

Ever since Ronald Reagan rejuvenated the American free-market system in the 1980s with lower tax rates, deregulation, and disinflation, the U.S. economy has vastly outperformed its industrial trading partners in Europe and Japan. Amazingly, we’ve slogged through only five negative-GDP quarters over the past twenty-five years, for an unbelievable prosperity rate of 95 percent. Our stock market has increased twelve-fold in this period.

Then, in 2003, President Bush’s large-scale tax cuts on capital lit the booster rockets that launched today’s tremendous bull-market economy.

The Dow Jones is setting new highs almost daily. U.S. employment stands at a record 150 million. Household wealth is $56 trillion, another record. And contrary to what the bubbleheads keep telling us, the market value of assets is growing roughly three-times faster than the value of debt liabilities.

None of this would be happening if we weren’t already competitive.

The alleged demise of U.S. manufacturing is a key example of how uncompetitive perception often trumps competitive reality. U.S. manufacturers produced $1.5 trillion worth of goods in 2005, up 70 percent from $900 billion in 1992, according to Edward Gresser of the left-leaning Progressive Policy Institute. Manufacturing now accounts for a higher share of the U.S. economy than it did fifteen years ago, and for the same share of world production it enjoyed in the early 1990s. Yes, there have been manufacturing job losses, but virtually all of them have come from productivity-enhancing automation.

Another mistaken criticism alleges that the vast majority of new jobs are low wage. Not true. Last year, the two biggest job-creating sectors -- education/health services and professional/business services -- paid their non-management workers significantly more than the average wage for all workers.

Then we have the liberal commentators who rail on about “income inequality.” Democrats in Congress would solve this by taxing the rich. But such fossilized, populist thinking will only take the capital out of capitalism.

Inside the historically low 4.5 percent unemployment rate, there’s a 7.5 percent unemployment rate for those with less than a high-school diploma, a 4.5 percent rate for high-school grads, and a mere 1.8 percent rate for those with college degrees or better. Or look at these figures: Americans who don’t finish high school earn roughly $429 a week. Those finishing high school pocket $602 a week. And Americans with a bachelor’s degree or higher take home $1,030 a week.

So it pays in this country to stay in school.

But if the Treasury Department and Congress really want to improve American competitiveness, they must continue the Reagan tradition by bolstering our corporate tax competitiveness.

Right now, the U.S. suffers from one of the highest corporate tax rates in the world. While the European Union has been cutting business taxes -- the average for EU countries is now only 27 percent -- the U.S. is stuck with a 40 percent corporate income-tax rate. Booming Ireland boasts a corporate rate of only 10 percent. Even France’s rate comes in lower than the U.S. rate.

What’s more, our companies are double-taxed on the profits they make in the U.S. and abroad. Not so in Europe. Across the Atlantic, companies are spared this burden through tax rebates. This disparity not only reduces our competitiveness, it forces our companies to leave profits sitting idly overseas.

Here’s a good idea, courtesy of Loews CEO James Tisch: Reduce the corporate capital-gains tax rate from 35 percent to 15 percent. Mr. Tisch correctly believes that this would unlock hundreds of billions of languishing corporate asset dollars, injecting new oxygen into the corporate bloodstream. It’s a move that would pay for itself by unleashing a flood of new businesses and jobs, along with a tidal wave of new tax receipts. France and Germany have virtually no capital-gains taxes.

So, while accounting reforms are all well and good, new tax incentives will have a far greater impact on economic competitiveness than mere bookkeeping. No “competitiveness action plan” can be complete without full-scale corporate tax reform.