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This is the culprit behind our slow economy

SlowBy Larry Kudlow and Stephen Moore

From CNBC:

GDP for the first quarter of 2016 came in at a paltry 0.5 percent. That sorry showing follows growth of 1.4 percent and 2 percent in the previous two quarters. If such a thing is possible, the already anemic economy is actually getting worse.

But even worse than that, the latest GDP numbers reveal nonresidential business investment, the real driver of the economy, has declined for the past two quarters.

When businesses don’t spend and invest, they don’t hire and cannot offer better-paying jobs. Business investment and wages are two sides of the same mirror. If a company purchases five trucks rather than 10, there are five fewer trucking jobs. If employers don’t invest in more computers, there are fewer programming jobs. If businesses don’t purchase more jackhammers and cranes, fewer construction workers are hired.

Why? One key factor is tax policy, especially business tax policy.

At 40 percent for combined federal and state business tax rates, the U.S. has the largest corporate tax burden in the developed world.

We double-tax corporate profits earned overseas, as virtually no other country does. Our depreciation rates for investment-tax expensing are among the worst in the world. And despite all the talk about corporate-tax reform, nothing gets done—even under a Republican Congress.

What’s more, the Obama administration has raised tax rates on capital gains, dividends, and income (paid by small-business pass-throughs). So, as the tax cost of capital has gone up, business investment has come down.

Arthur Laffer has taught us that “if you tax something, you get less of it.” That’s why firms are moving offshore in droves. It’s not about being unpatriotic. It’s that it doesn’t pay, after-tax, to invest in the United States.

A second key reason for the business-investment slump is monetary policy. While this may not be the right time for rate hikes, ultra-low interest rates have led to financial engineering rather than the deployment of excess corporate cash for productivity-enhancing investment.

Rather than invest in job creation and higher wages, firms are buying back stocks to boost price-earnings ratios. In many cases, they are even borrowing money they don’t need to buy back stocks.

A third key reason for the business-investment decline is over-regulation. Obamacare rules and mandates are job-killers. Dodd-Frank red-tape costs have held back lending to such an extent that business start-ups have practically come to a halt. And community banks have drastically pulled back loans to existing small businesses.

Then we have the Obama Environmental Protection Agency‘s new rules, which amount to a war on fossil fuel. The president pushes for climate-change regulations instead of a massive build-out of energy infrastructure, including pipelines, liquid-natural-gas terminals, and new refineries.

Want more manufacturing? The energy business, and the potential for North American energy independence, is the key. Hillary Clinton, and her promise to end oil and gas fracking, will pull us further in the wrong direction.

Many people do not to understand that business investment is a critical prosperity-booster, leading to more jobs, higher wages, and stronger family income. Put another way, rising tax and regulatory burdens that penalize investors and businesses also punish middle-income wage earners.

And it’s these wage earners who would benefit most from business tax reforms, such as a 15 percent corporate rate for large C-corps and small S-corps. This should be accompanied by immediate tax-deduction expensing for new investment and a territorial tax regime that would stop double-taxing profits earned abroad.

Study after study shows that corporate-tax reform is a middle-class tax cut, not a tax cut for the rich. You see, corporations don’t really pay taxes. They simply collect them and pass the cost along in the form of lower wages and benefits, higher consumer prices, and reduced shareholder value.

The overarching theme of this election is an angry revolt by the middle class over the fact that jobs and wages have barely increased in the past decade. They blame Washington, China, immigration, power elites, and almost everything else. So be it. There is a lot of work to be done on all these fronts. But without radical tax, regulatory, and currency reform, business investment will never fully recover.

And neither will the economy.

Commentary by Larry Kudlow and Stephen Moore. Kudlow is a senior contributor at CNBC and economics editor of the National Review. Stephen Moore is an economist at the Heritage Foundation. Follow them on Twitter @Larry_Kudlow and @StephenMoore.

Photo Credit: Zdenko Zivkovic

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