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Tuesday, November 8, 2011

The US Must Be a Tax-Free Export Zone

Can Congress help our anemic economy generate new jobs that are not directly or indirectly funded by taxpayers? Yes it can, but first members of Congress must understand the cold realities of our nation’s economic dilemma.

The combined financial and psychological effects of a 10% unemployment rate on consumer spending can’t be overstated. The unemployed are buying only the bare necessities while employed Americans are anxiously looking over their shoulder at the 10% unemployment rate. Worried about the possibility of joining the unemployed, many of the employed have reduced their purchases. So until the 10% unemployment rate declines to normal levels, we can’t look to the American consumer to get the economy moving again.

As 70% of the US economy is driven by consumer spending, American business is highly dependent on the American consumer. Burdened by excess capacity and the costs of excessive government regulations, US companies are unlikely to add significant capacity by investing in new employees and equipment until consumer spending increases. So we can’t look to business spending to get the economy moving again.

The federal government has spent unprecedented taxpayer funds on “stimulus” spending but has stimulated neither employment nor the economy. So we can’t look to higher government spending to get the economy moving again. The Fed has exhausted its bag of monetary hat tricks without having material impact on the spending decisions of consumers and business. So we can’t look to the Fed to get the economy moving again.

An economy’s size is the sum of (1) consumer spending plus (2) business investment plus (3) government spending plus or minus (4) the trade balance. As we can’t look to the first three for much help, we must look to higher exports to get the economy moving again. Domestic sales are not going to grow materially, so US companies must increase exports to gain new revenues. Employment will increase when export sales increase enough to require additions to existing capacity.

A significant expansion of US exports will increase American jobs while also reducing the national debt. In 2008, Germany’s, the UK’s and Japan’s exports as a percentage of GDP were 59%, 35% and 21%, respectively. US exports were $1.9 trillion - only 13% of GDP. US exports could double and not even approach the relative levels of those in Germany or the UK. How many new jobs would be created by an additional $1.9 trillion in export sales of US products and services? Whatever the number, these new jobs will pay for themselves rather than be funded by taxpayers and will generate higher federal tax payments to help reduce our national debt.

How can the new Congress help transform America into the world’s greatest export machine? Because US firms pay one of the world’s highest income tax rates, they are at a disadvantage when competing in the global economy. Congress should permanently waive the corporate income tax on new export sales. One approach is to waive the corporate income tax on that portion of a company’s export sales that exceed its export sales in the year prior to this reform’s enactment by Congress. This one reform will provide a huge incentive for US companies to seek new export business in foreign markets and will make US companies more competitive in the global economy.

A tax-free export zone enables American companies to take advantage of existing unused business capacity rather than require, as does the current equipment depreciation acceleration law, acquisition of new equipment in order to get the tax benefit. US business has little appetite for acquiring new capacity until consumer spending and/or exports climb and existing unused capacity is reduced. Tax stimulus proposals - especially temporary measures - that only tinker with the cost structure of US business do not confront the blunt reality of how we get the economy moving again: it’s by increasing business revenues. Turning the entire US into a tax-free export zone is definitely not tinkering. It’s a fundamental game changer for American companies and American jobs.

The export tax waiver must be permanent because even after the unemployment rate declines, we need every export dollar to reduce our national debt before interest rates rise to levels that make it impossible for Washington to ensure national security, provide essential public sector services and honor America’s debt obligations. Government debt can be reduced only by private sector cash flow.

Fortunately, the aggregate scale and higher growth rates of Asian and Latin American economies provide substantial export opportunities for American firms. Unlike the millions of debt-addicted American consumers still struggling with spending hang overs, Asian and Latin American consumers are generally not yet infected by chronic debt. They can consume a higher portion of their relatively low incomes because they do not have large American-style loan repayments.

Making the entire US a tax-free export zone is not a cure-all for our financial problems. But this one reform will generate incremental revenues that will strengthen our companies, reduce unemployment, reinvigorate consumers and help pay the interest and principal on our huge national debt.

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