The tax deal currently in Congress may very well further exacerbate the ongoing regime uncertainty, throttling business creation and expansion in the United States. The Wall Street Journal reports:
In the late 1990s, there were typically fewer than a dozen tax provisions that had just a limited lease on life and needed to be renewed every year or so.
Today there are 141.
Now Congress, taking up a deal worked out between the Obama administration and Republican leaders, is poised to turn the whole personal income-tax system into something of a temporary structure. The plan embraces a broad range of provisions-an extension of Bush-era rates, a new estate-tax formula-but for only two years. A payroll-tax cut in the bill is for a single year.
The level of uncertainty, unusual for developed nations, complicates planning and discourages hiring and investment, many economists and corporate executives say.
“I haven’t seen anything like it, and it’s hard historically to find anything like” the current and pending negotiations, says Mortimer Caplin, an Internal Revenue Service commissioner in the Kennedy administration who at 94 is just three years younger than the income tax itself. “This Congress has left an awful lot up in the air.”
“Regime uncertainty” is a phrase coined by Robert Higgs who argued that “the New Deal prolonged the Great Depression by creating an extraordinarily high degree of regime uncertainty in the minds of investors.” Faced with uncertainty over the government’s policies, investors shied away from making long-term private investments.
A Washington Post editorial this summer used the idea behind regime uncertainty to explain weak private-sector hiring in the wake of the recent recession:
But as analysts ponder the mystery of weak private-sector hiring despite signs of economic growth, it’s worth asking what role is played by government-induced uncertainty. With the federal government promoting major changes in health care, financial regulation and energy law, it wouldn’t be surprising if some companies are more inclined to wait and see than they might otherwise be. And that’s especially true when they look at looming American indebtedness and the effect that could have on long-term interest rates.
Current tax rates should be extended permanently. Instituting a temporary tax regime breeds uncertainty among investors and businesses, which slows economic growth and job creation. As my colleague Hadley Heath blogged about earlier today, the U.S. ranks highest among the top corporate income tax rates among OECD countries, which puts businesses at a disadvantage in global competition. Adding tax uncertainty on top of that makes for a bad combination of incentives, encouraging business to grow and create jobs somewhere else.