Robert Mundell’s prescription for economic growth

Robert Mundell, a Nobel laureate in economics, urged the U.S. government to cut the corporate tax rate and make the Bush tax cuts permanent in a recent interview with The Economist.

Mundell claims that the biggest problem facing the U.S. and Europe is economic growth. There are two things that the U.S. can do to tackle this problem, he explains. First, the Obama administration has extended the Bush tax cuts by another two years, and should make it permanent. Second, it should lower the American corporate tax rate to 15-20 percent, which would pave the path to a better recovery. America’s 35 percent corporate tax rate is higher than most of the countries in the world.

The U.S. corporate tax rate has long been a concern pushing back potential businesses and foreign investors. Earlier this year, 60 Minutes disclosed the fact that there has been an exodus of American companies to free themselves from the high domestic tax rate and seek tax havens in other places around the world. Over the past few years, some companies moved their headquarters to Ireland and Switzerland  where the tax rate is much lower in an attempt to dodge America’s high one. As a result, they not only escaped the obligation of paying over $10 billion of taxes, but also shifted millions of profits and thousands of jobs to overseas.  In a globalized world, companies are smart enough to vote with their feet for destination of doing business. The secret of healing unemployment has been brought on the table and it still needs more attention in the Capitol Hill.

When it comes to the debt crisis sweeping southern Europe, Mundell offers some remedies that are also helpful for their American counterparts to look at their own debt problem.  Mundell points out that the European Union has to hold those nations in crisis accountable to their obligations. The only path to reach this resolution might be to reduce entitlements. It can be politically painful to a large extent but Mundell believes there is no alternative way to get through it. Devaluing the currency doesn’t seem possible because those nations are part of the Euro zone. When nations like Greece were about to default their debts, Germany and France worked out a mechanism to provide liquidity to them.  Unfortunately, if America were to default its debt, who is going to bail it out? Besides cutting entitlements, depreciating the greenback might work, but it would come at a cost of soaring inflation in the short run and open a gate to the uncontrollable deficit in the long run.

 

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