Jobs Creation Act: Original Bill Provides Most Growth

(Click here for methodology)

The American Jobs Creation Act of 2003 that was sent to the full House on October 28 is an anemic, willowy version of the original legislation as authored by Ways and Means Chairman Bill Thomas.

If Congress really intends to use this legislation to assist the economic recovery and expand the job market then conferees should fight to include as much of the original language of H.R. 2896 as possible.

Creating Jobs & Growing GDP
The bill addresses a finding by the World Trade Organization (WTO) that current U.S. tax law provides "illegal" tax credits to businesses for the taxes those businesses pay to foreign governments. The American Jobs Creation Act eliminates those tax credits and compensates businesses through new deductions, credits and lower tax rates.

While American Jobs Creation Act does create thousands of jobs, the first version of H.R. 2896 addressed the concerns of the WTO more vigorously and contained a number of pro-growth provisions that disappeared when the final bill emerged from committee.

The original version of H.R. 2896 contained a number of provisions that would boost economic activity if enacted. The Committee dropped or revised:

• Reduction in corporate income tax rates.
• Extension and modification of the research and development tax credit.
• Incentives to reinvest foreign earnings in the United States.
• A two-year extension of increased expensing for small business.
• A one-year extension of bonus depreciation provisions enacted in the last two tax bills.
• Expansion of manufacturing equipment depreciation.
• Repeal of extra-territorial income provisions.

Although the Committee bill still contains:

• Rate reductions for manufacturing establishments and small corporate taxpayers.
• A two-year extension of increased expensing for small businesses.
• Repeal of extra-territorial income provisions.

To assess the likely effects that these modifications to the original tax bill might have on U.S. economic performance, in the Heritage Foundation's Center for Data Analysis introduced the proposed tax law changes into a model of the U.S. economy.[1] CDA analysts performed two, separate simulations: one for the original proposal and one for the compromise. In both cases, these analysts used the same model of the economy. The results show how important the pro-growth elements were to the original version of the American Jobs Creation Act.

Chart 1

• Gross Domestic Product: ( see Chart 1) The original legislation is associated with higher GDP than the compromise bill. Between 2004 and 2008, the original bill produced an average of $37 billion more in inflation-adjusted national output than the compromise, which produced only $5 billion on average.
  
• Job Creation: ( see Chart 2) The Global Insight model indicates that the original bill would produce an average of 267,000 jobs per year between 2004 and 2008. The compromise bill, however, produces a paltry 40,000 per year.
  
• Disposable Personal Income: Personal income after taxes rises by an average of $30 billion inflation-adjusted dollars with the original version of the American Jobs Creation Act. However, disposable personal income rises by only $5.4 billion on average and after inflation between 2004 and 2008.
  
• Consumption Expenditures: The purchases of individuals rise on average by $26 billion (after inflation) over the period 2004 through 2008 with the original bill. This same model of the U.S. economy shows only $5 billion on average over this same time period when it uses the tax changes from the compromise bill.
  
• Business Investment: The original version of the American Jobs Creation Act would likely have worked wonders on the recently weak pace of business investment. The Center estimates that the original version would have produced an average gain of $22 billion in business investment (after inflation). The version reported out of Ways & Means would produce an average of about $2 billion more over the period 2004 through 2008.

Chart 2

In short, the bill that the Ways & Means Committee sent to the full House could have done much more for job creation and the general health of the U.S. economy than the legislation that is now before the full House. The original version of the American Jobs Creation Act did more for job creation than the Committee version because it cut tax rates more, reduced the taxes on capital more aggressively, provided stronger incentives to bring foreign investments by U.S. companies back to the United States, and more strongly and vigorously supported domestic U.S. research and development.

While both bills represent a step in the direction of broader, fundamental tax reform, what Chairman Bill Thomas originally conceived also was a step toward more jobs and stronger economic growth.

(Click here for methodology)

[1] CDA used the Global Insight, Inc. U.S. Macroeconomic Model to conduct this analysis. The methodologies, assumptions, conclusions, and opinions in this report are entirely the work of Heritage Foundation analysts. They have not been endorsed by, and do not necessarily reflect the views of, the owners of the model.