If you itemize deductions, the IRS says you’ll need to wait until the end of February to file your 2010 tax return. That’s because lawmakers waited until Dec. 17 to temporarily renew the 2001 and 2003 tax cuts. Those cuts will remain in place for another two years, at which time the country may again face months of uncertainly. This brings a price tag.
When business leaders and entrepreneurs aren’t certain what their tax rates will be, they’re less likely to make the long-term investments our country needs to grow its economy. In fact, if federal policy favors immediate spending instead of investment (the idea behind tax rebates and immediate reductions in withholding) business leaders are more likely to make decisions to boost their bottom line right now instead of opting to do something expensive, such as hiring workers or opening new plants, that won’t pay off for years.
Government policy matters. Consider Egypt.
Hernando de Soto, an economist who specializes on the importance of property rights, explains just how difficult it is to do business there. “To open a small bakery, our investigators found, would take more than 500 days,” de Soto wrote in the Wall Street Journal. “To do business in Egypt, an aspiring poor entrepreneur would have to deal with 56 government agencies and repetitive government inspections.” Small wonder few people own property and businesses struggle to expand.
Compare that to the United States. CNN/Money ranked the U.S. third in the world in its 2009 list of best countries for startups. Our country features “a relatively low cost and short application process to start a business, speedy importing and exporting processes, and strong investor protections,” the magazine wrote.
“Countries that reduced government spending had economic growth rates almost two percentage points higher in 2009 than countries whose govern¬ment spending scores worsened, and countries with the highest rates of government spending had gross domestic product (GDP) growth rates 4.5 percentage points lower on average than countries where government spending was best contained,” Ambassador Terry Miller writes in the latest edition.
But in many ways, federal policy is driving us in the wrong direction. Nobody knows what the tax rates will be in two years. ObamaCare may impose massive costs on American businesses, or it may be thrown out by the courts. Federal regulators want to increase their oversight of the internet and may even define carbon dioxide -- which we all exhale every day -- as a pollutant.
No wonder many businesses aren’t hiring.
Instead, they’re holding on to some $1.8 trillion in cash, about 25 percent more than they had on hand at the beginning of the recession. They’ll only start investing when they have a better idea what the future will hold.
For example, the Wall Street Journal reports that in 2007 Congress mandated our country would use 100 million gallons of cellulosic ethanol by 2010 and 250 million gallons this year. Sounds great, except that no facilities then existed to create this wonder fuel. So the government poured tens of millions in subsidies into “green companies,” with nothing to show for the “investment.” Lawmakers eventually reduced their 2010 target to 6.6 million gallons. Of course, this gets things exactly backward.
Instead of demanding that companies come up with a particular type of fuel and paying them subsidies to try (and in this case fail), lawmakers should allow the market to create incentives. As gasoline prices rise during the worldwide economic recovery, inventers will eventually develop a viable alternative to gasoline. But it will come from entrepreneurs, not legislators.
The best steps Washington could take? Set stable, sensible policies. And stay out of the way.