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February 10, 2009

The Power of Zero

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In Washington, politicians like to seek common ground. So let's begin by noting that many from both parties agreed with President Barack Obama's recent warning: "A failure to act, and act now, will turn crisis into a catastrophe and guarantee a longer recession, a less robust recovery, and a more uncertain future."

Both right and left can also agree that Congress can help create jobs and generate growth.

But if lawmakers really want to trigger a recovery, they'll shelve their massive "stimulus" bill -- a trillion-dollar debt plan that would actually weaken the economy. They'd do much better to take a simple but powerful step: reduce the corporate income tax rate to zero.

Total corporate tax receipts each year add up to about $300 billion. It's a mammoth sum, but less than a third of what liberal lawmakers seem dead set on spending. Besides, corporations don't pay taxes; people do.

Take Caterpillar, the heavy-equipment manufacturer. It recently made news when it laid off 20,000 people just one year after it actually hired 11,500 new workers. The company reported pre-tax income of $6.3 millionin 2007. It paid $1.48 million in income taxes that year. Imagine how many of those jobs could have been preserved if the company hadn't had to fork over almost a quarter of its income as taxes.

Our corporate tax rate is 35 percent, second only to Japan among nations in the Organization for Economic Cooperation and Development. That makes companies less likely to base their headquarters in the U.S. or to open plants here. Eliminating corporate taxation, on the other hand, would encourage businesses to expand and hire Americans.

This wouldn't mean getting rid of all tax revenues, of course.

Even without corporate taxes, the owners of any type of organization would still be taxed in one of three ways: through their dividends, their capital gains or their salaries. Eliminating corporate taxation would simply mean that all income is taxed once -- when it's earned by individuals -- instead of being taxed a second time when it's earned by a corporation.

Some will protest, of course.

Our nation's convoluted tax code (so confusing that even a high percentage of President Barack Obama's nominees apparently can't understand it) keeps a small army of accountants and tax lawyers employed. A simplified code might put them out of work. But that would be a small price to pay for a fairer system, one that helps create many more jobs for ordinary Americans.

And creating jobs is what a federal stimulus is supposed to be all about.

A plan proposed by Sen. Jim DeMint, R-S.C, and The Heritage Foundation calls for slashing tax rates on individuals and corporations by 10 percent while repealing the alternative minimum tax and reducing the death tax. A Heritage study shows doing this would result in 493,000 more American jobs by the end of the year. By the end of 2010, employment would increase by 1.3 million jobs.

Imagine how many more jobs our economy could create if the government went further, completely repealing the corporate income tax. Multinational and international companies would be encouraged to operate in the United States. They would hire workers, bringing jobs and new technology to our shores.

Meanwhile, owners of corporations would have more money to reinvest in research and development and in buying new equipment. They would be more likely to hire and train Americans, since there's less reason to even consider moving their business to another country. As these investments pay off, economic growth will occur.

Lawmakers should think carefully before they borrow hundreds of billions of dollars, digging a deeper debt hole and expanding the size and scope of government. Far better to eliminate corporate taxes -- and unleash the job-creation power of our nation's entrepreneurs.

Ed Feulner is president of The Heritage Foundation.

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