Ending the Corporate Tax Will Create Jobs

Virginia has the opportunity to act decisively to create a more just, productive, and economically competitive environment. To reach this goal, I advocate the complete elimination of Vir ginia's corporate income tax.

We need to take bold action to protect and create jobs here in Virginia.

Our combined federal and state corporate income tax rate of 41 percent (35 percent federal plus 6 percent state) is now the highest in the world -- surpassing Japan and communist China -- and is double the average rate in developed countries. While other countries have been slashing this tax, America has been asleep at the switch.

A first misunderstanding is to suppose that rate cuts lead to lower tax receipts. Nothing is less true. Investment and work behavior change when taxes are less onerous. Everyone knows this is true, even if they don't want to admit it. But government largely uses a "static" model of tax revenues that ignores human behavior -- something that businesses would never dream of doing.

During the past 20 years, dozens of countries have concluded that the corporate income tax is one of the most economically destructive mechanisms for raising revenue because it destroys production.

While other countries have been cutting corporate income taxes year after year, our corporate taxes have remained the same, destroying our competitive position. Today, many continue to talk about punishing companies that move jobs overseas -- but the more rational course of action is to stop punishing them for staying here.

Countries and regions that have cut the corporate income tax have experienced impressive increases in the rate of new jobs, corporate relocations, economic competition, and new investment. The evidence is overwhelming.

Abolishing this tax, with a date certain 12 to 24 months in the future, creates a "wow" factor for growth while still building tax revenue until the actual implementation. This window buffers state revenue while building the base that culminates in a sustained growth of revenue created by an ensuing 0.5 percentage point to 1 percentage point expansion in the annual growth rate of Virginia's GDP. This roughly translates (on the low end of expectations) to creating new jobs for the entire city of Bristol -- population 17,000 -- every year.

The Congressional Budget Office reported in 2006 that more than 70 percent of the burden of corporate income taxes falls on labor. A European Union study of 50,000 businesses found an even stronger connection to wages -- a 1 percent increase in corporate income tax rates leads to a 0.92 percent decrease in real wages.

It would be easy to criticize eliminating this tax as a give-away to major corporations. But this initiative is so overwhelmingly pro-labor that it is hard to understand why business people have to be the ones to propose it.

National and provincial governments across the political spectrum have been working to cut this tax and have experienced increasing tax revenue as a result. People don't understand how destructive the tax is to jobs, investment, and business growth. They certainly don't understand that labor ultimately pays the highest price. Labor deserves the right to negotiate for this portion of company profits.

While removing this tax will indeed lead to ongoing expansion of the economy, the justification is not just financial but moral: Shareholders should not be double taxed -- they should be able to reinvest profits. Labor should not be deprived of higher earnings.

I note that this stimulus to a state or nation's economy does not discriminate as to industry or interest group. Eliminating the corporate income tax will offer a true stimulus that requires no bias -- you do not have to have a stake in a government-subsidized industry to benefit. The current federal "stimulus" initiatives -- in the form of expanded government spending and income redistribution -- ignore the important difference between market investments of private capital on the one hand and government programs that usurp markets and drain away private investment capital -- or dilute our currency -- on the other.

There is no other long-term method or greater incentive for creating jobs and growing an economy than profits.

No state or nation should need to apologize for restoring the incentive for businesses to grow and become more prosperous. Even charities require the existence of profits in an economy.

The only way to have more jobs and a stronger economy is with a stronger business community. The only stimulus to a bigger and stronger business community is to allow individuals and businesses to take the risk, innovate, and to out-compete others -- while reaping the rewards.

I urge Gov. Bob McDonnell and our elected representatives in the General Assembly to send a bold message and implement this policy with all due haste -- for the benefit of all of the citizens of the state.

Bob Marcellus is president of Richmond Group Fund Co. Ltd. He served on Gov. Bob McDonnell's economic development transition team. Contact him at trading@richmondgroupfundco.com.