Kerry on Jobs: Smart Politics, So-So Policy

His plan for creating jobs hits the right notes on the stump, but likely wouldn't boost employment above projected long-term growth rates

By Mike McNamee

For John F. Kerry, it's the jobs, stupid. His latest economic plan, unveiled Mar. 26 in Detroit, puts U.S. employment ahead of every other goal. "My plan will enable our economy to create jobs and keep more good jobs here in America," the prospective Democratic Presidential nominee declared. Sticking to his theme of attacking "Benedict Arnold" corporations, Kerry vows to eliminate tax provisions that he contends gives companies an $8 billion annual subsidy to move jobs offshore. With the resulting revenue, the Massachusetts senator would create a tax credit for companies to expand U.S. payrolls. That credit would be aimed at manufacturers but also would apply to service companies whose work might easily be moved overseas.

No question, Kerry's Jobs-First Economic Plan is hitting the right political notes. The Democrat is picking up steam among voters whose top concern is jobs -- a rapidly growing group that includes even white-collar workers looking over their shoulder at the threat from offshore outsourcing (see BW Online, 3/22/04, "One Giant Labor Pool?"). But much of Kerry's robust economic nationalism represents a short-term reshuffle of tax burdens. If implemented, his approach likely could lift employment in the first year of a Kerry Presidency, although much of the new tax breaks would go to companies that already plan to hire.

The candidate sets a catchy and seemingly ambitious goal: Create 10 million American jobs during his four-year term. However, the odds are good that the American economy will create 10 million jobs over the next four years -- regardless of Kerry's plan. His ambition is to add 208,300 new jobs a month -- a welcome relief from the 61,000-a-month average since last August but not a remarkable pace for a normal expansion. After all, from the employment trough of November, 1991, to the its peak of March, 2001, the economy created 216,700 payroll jobs, on average, every month for 112 months (see BW Cover Story, 3/22/04, "Where Are the Jobs?").


  One centerpiece of Kerry's plan breaks the mold: He proposes cutting the corporate tax rate from 35% to 33.25%, a rare move for a Democratic candidate. And while some of his numbers are still squishy, Kerry was careful to stress that his proposal is balanced -- countering the GOP's ongoing campaign to paint him as a tax-hiker.

What's the economic impact? Some companies would clearly gain -- especially U.S.-only operations that are rapidly hiring. The credit for new employees -- designed to offset the employer's share of payroll taxes on new jobs for two years -- could inspire some hiring, although much of the benefit would flow to companies that were already adding jobs. Similarly, most savings from a lower corporate tax rate are likely to flow to shareholders and lenders -- not to workers.

It's also hard to support Kerry's boast that he's offering "the most sweeping simplification of international taxes in over 40 years." His plan is weakest where his rhetoric is strongest -- on forcing companies to reconsider foreign-expansion plans. The tax effects of locating, say, a call center in India are tiny, vs. the 75% or 80% wage savings a company can reap. After all, for the typical U.S. corporation, taxes are a fraction of profits -- which in turn are a fraction of wages and other costs.


  Under current law, companies owe 35% U.S. corporate income tax on foreign earnings, minus a credit for taxes paid in the country where the plant is located. Typically, U.S. companies can defer the U.S. tax by reinvesting those profits overseas -- rather than directing them to shareholders or U.S. operations. The Congressional Research Service figures U.S. companies have stashed $600 billion in such profits overseas.

Kerry's plan to end tax deferral on profits retained overseas divides those earnings into two classes, based on how they are reinvested. Companies could still defer taxes on overseas profits reinvested in facilities whose output is targeted at foreign markets -- but would get no deferral on funds poured into overseas facilities that serve the U.S. market.

Deciding which profits are which -- when companies use a mix of retained earnings, equity, and borrowing to build factories and offices that serve global markets -- promises to create a whole new level of international tax gamesmanship. That's a sport U.S. corporations know all too well and pay a phalanx of tax attorneys and accountants to help them play.


  Kerry's plan does include an incentive to tempt companies to bring foreign-made profits home. He offers a one-year tax discount: They'd pay just 10% in tax, instead of 35%. But future foreign profits would be treated more harshly: Companies would pay immediate U.S. tax on most, but not all, earnings from overseas operations, with no deferral. Both these measures would raise revenue, Kerry figures, and pay for a 5% drop in the overall corporate tax rate -- from 35% to 33.25% -- plus the corporate tax credit to underwrite new job creation.

The quick preparation of a tax plan with lots of specifics shows that the Kerry economic team is starting to gel. But this plan is better suited for the candidate's short-term political needs than for serious policy to boost hiring over the long haul.

McNamee is deputy bureau chief in Washington for BusinessWeek

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