Conservatives and liberals need to work out some practical measures to help small businesses and infrastructure.
At a time when many countries are facing high unemployment rates, the pressure is on their governments to do something. US President Obama's proposals for job creation includes a mixed bunch of measures, such as free trade agreements and corporate subsidies, and it's anybody's guess how many jobs they would create. Not many people want governments to start hiring more, as public sector employment is already bloated.
A super-committee of legislators in the US is working to devise budget cuts that must be approved by November 23, otherwise automatic cuts to Defence and other budget items amounting to $1.2 trillion (about Rs 56.4 lakh crore) would come into place. The proposal of the President to impose a 5.6 per cent surtax on those earning more than $1 million (Rs 4.7 crore) — to support state governments in hiring, or in preventing layoffs, of teachers, policemen and firefighters — is stuck.
PRIVATE SECTOR INCENTIVES
So, what can the government do to generate more private sector employment? Policy instruments with the government, that include direct and indirect measures, are quite limited. Direct measures such as the President's proposal to invest in infrastructure, do not seem to have wide support. The sticky issue is where the money is going to come from, at a time when governments are running large budget deficits. A smaller proposal to give tax credit to companies that hire veterans is likely to pass.
Indirect measures, where the government tries to ease the conditions to facilitate private investment, are quite iffy. A minor measure that passed the legislatures was repeal of a 3 per cent withholding of payments to contractors by the government. The withholding was done in case contractors overcharged for their services, and was introduced a few years ago when it was found that thousands of contractors had not paid federal tax bills. With the repeal, both parties in the US Congress (that is, legislature) are patting themselves on the back, but nobody knows if it will create one additional job.
TAX HOLIDAY IMPACT
Corporates are demanding a tax holiday. Presumably, this would allow them to invest the money they would otherwise have paid as taxes in job-creating schemes. It is also an incentive to bring home large sums of monies that many have legally stashed around the world.
But a Left-leaning think-tank, the Institute of Policy Studies, says that it may not be a good idea. Analysing past data, the IPS finds, “Following a tax holiday on repatriated foreign earnings in 2004, 58 corporations that benefited from the holiday slashed nearly 600,000 jobs through layoffs. These 58 giant corporations accounted for nearly 70 per cent of the total repatriated funds and collectively saved an estimated $64 billion from what they otherwise would have owed in taxes.”
Corporations are rational beings and will naturally seek ways to minimise their tax liability. Nationalists may see this as disloyalty. Thus, the IPS also reports that profitable US corporations are evading about $100 billion (about Rs 4.7 lakh crore) in taxes each year. Apparently, last year alone, corporations including General Electric, Verizon, and Ebay actually received tax refunds from the government.
Another intriguing statistic they report is that 25 of last year's 100 highest-paid US CEOs received more compensation than their company paid in federal corporate income taxes. Tax reform always gets stuck in the corridors of power, thanks to lobby groups.
Take, for example, a Bill, titled ‘Stop Tax Haven Abuse Act' that would make it difficult for people to take advantage of countries that have very low taxes, or secrecy laws that makes it difficult for the US tax authorities to recover funds from overseas. A few senators have introduced the Bill regularly for the last three years, but it fails to come up for a vote!
Perhaps, a relevant question to ask is if the interests of the nation diverge from those of its corporations. In the mid 1950s, the then Chairman of General Motors, the US auto company, is reported to have said that ‘what was good for GM was good for America'.
That was a time when GM loomed large in the corporate world. Although GM has taken quite a dive since then, the general belief in the US is that what is good for the corporate world is good for the country.
But US companies' profitability has been good even though the economy is struggling. Many US corporations continue to be leading players in the world, but they generate a majority of their revenues and profits outside the country. For example, IBM, a quintessential US company, now employs more people outside the US.
As part of their global strategy, US corporations, like many others around the world, make their business decisions in the interests of their shareholders, who are not all residents of the country where the company is registered.
Conservatives continue to push their agenda of reducing taxes, so people have more money to spend and businesses have more money to invest, while liberals push their ideology of the government having to spend more to stimulate demand. With Europe still struggling to achieve a semblance of financial stability, and with US politicians staking positions for next year's presidential election, disagreements and prospects of doom and gloom occupy the airwaves more than that of hope.
Neither governments nor the corporate sector have any exclusive solution to the problem of creating jobs in a depressed economy. Rather than be stuck with their ideological differences, all sides need to get down to some practical measures.
They need to get together, to arrive at tax credits that will help local, small businesses; clear irrelevant governmental regulations; and perhaps create public-private partnerships that channelise investments into crucial areas of infrastructure.
(The author is professor of International Business and Strategic Management at Suffolk University, Boston, US.firstname.lastname@example.org)