Shawn Massey, CCIM, SCLS

How do We “Really” Create Jobs in the United States? By Ronald W. Spahr

Although I try to stay out of the political field the concept of job creation is so critical to the demand for space that I find it an important subject to debate!  I have attached an draft article from guest blogger Dr. Ronald W. Spahr on the subject of job creation.  I hope that you enjoy!

How do We “Really” Create Jobs in the United States?

                                                                            By Ronald W. Spahr*

All politicians seeking office vow that a high priority is to create jobs.  This is and has been a chronic problem in the U.S. for at least the prior 20 years.  However, invariably, politicians and many economic advisors are not specific on how to create jobs, and, in my opinion, are often on the wrong track.  Significant disagreement exists on how best to achieve this goal.

 Many economists, especially those currently in Washington, believe that job creation begins with increasing the domestic demand for goods and services, the demand side, espousing remnants of Keynesian economics.  However in a world of global economic competition, merely creating additional demand for goods and services in the U.S. does not necessarily translate into needed job creation.  Increasing demand must also translate into a perceived improvement in the business climate and world competitive returns on invested capital.  The U.S. must create an economic environment that provides returns better than or at least competitive with other countries.  Economic incentives to attract and retain equity capital in the U.S., accompanied by debt capital, in turn, will result in capital formation, job creation and increased productivity.  This supply-capital formation component is missing in the attempts at economic stimulus in the United States and in many western European countries.

 In today’s competitive global economy with increased capital fluidity, capital tends to flow to venues (countries) that offer the highest “risk-adjusted” returns.  Thus, countries around the world are competing for capital that may result job creation.  We now must compete in a global economic environment with heterogeneous tax structures, regulations, standards of living, levels of infrastructure development and human and natural resources.  The ability to attract capital depends on these factors as well as possibly others, where it is not readily transparent which countries posses’ advantages in attracting capital.  However, it is obvious that capital formation, although not the only factor, is absolutely necessary for job creation.  Job creation and job retention depend heavily on maintenance of existing investment and new investment. 

 With respect to recent demand-side stimulus attempts, the US is increasing the demand for many foreign made products and creating jobs in China, India and other countries.  This, however, has not resulted in the level of job creation in the U.S. necessary to reduce unemployment levels and increase productivity and living standards. Instead, we need to focus on making our economy more competitive, providing incentives to attract capital from the rest of the world and retain the capital being generated in our country.  For at least the previous 20-years, a significant amount of equity capital has been flowing out of the U.S., and not enough equity capital has been flowing into the U.S. to stimulate capital investment necessary for increasing production and productivity-making domestically produced products and making potential U.S. exports more competitive.  Two critical steps necessary for creating jobs are to lower the business tax burden (the U.S. currently has the highest tax burden in the world) and creating a more business friendly environment.

 Around the world, effective marginal tax rates for companies range from zero in Dubai, where no corporate or personal income taxes exist, to levels approaching 50 percent in the United State where marginal corporate tax rates, including both Federal and state corporate and impact of personal income taxes, are close to the highest in the world.  Federal and state corporate taxes combined with personal taxes on dividends, capital gains and interest income result in the share of corporate earnings, through taxes, flowing to government approaching 50 percent.  Corporate tax rates have the greatest, highly elastic, impact on increasing required hurdle rates of return for new capital investment; thereby, reducing capital formation and the ability of the U.S. to compete for capital in the global economy.  Higher personal income taxes, although having some impact on a country’s ability to attract capital, have a lower, less elastic, impact on capital formation and resulting job creation.

 Many have argued that the average corporate tax rate in the United States (estimated at 27.6 percent by the World Bank) is significantly lower than the marginal rate (approximately 40 percent for combined federal and state) implying that corporate taxes are not adversely affecting capital formation.  This is untrue, however, since new capital investment will be undertaken only if potential investments are projected to be profitable.  Thus, marginal tax rates will apply in new project planning and are relevant for new project adoption decisions unless specific tax concessions exist.  The market is the best judge of capital investment productivity and viability; whereas, tax concessions necessarily involve government and politics.

 Jobs, especially manufacturing jobs, have been leaving the US for many years.  It has generally been argued that these jobs are leaving because of cheaper labor in developing countries or because of labor arbitrage.  Little attention has been focused on other factors causing jobs to be exported or on the lack of job creation in the US. Increasingly, the US labor force has moved into lower paying service jobs where true productivity is difficult to measure.  This has resulted in a situation in the US and Western Europe where we no longer have sufficient true aggregate economic productivity to support current standards of living.  Just as a person who spends more than his or her income, a high standard of living can be supplemented by borrowing or sell off assets.  In countries such as the US and those in Western Europe, countries are borrowing and selling off assets (negative balances of trade) to maintain living standards.  This, however, is unsustainable as we have observed recently in Greece, Ireland, Portugal and Spain.  Thus, the only way that countries can again achieve sustainable economies is to increase aggregate productivity or decrease living standards.  The most acceptable of these alternatives is to create a business environment that attracts external capital, creates internal capital, creates permanent-higher paying, productive jobs and increases aggregate productivity that is capable of sustaining desired living standards. 

 The recent National Commission on Fiscal Responsibility and Reform co-chaired by Alan Simpson and Erskine Bowles suggested substantial revisions in the income tax structure where one recommendation was to revise the personal income tax code to be a modified flat tax with few deductions and with three tax rate levels of 8 percent, 14 percent and 23 percent.  Thus, there would be little opportunity for wealthy Americans to avoid paying a 23 percent taxes on income, yet this tax would provide less incentive for off shoring and tax avoidance.  A flat tax would have the advantage of simplicity, where Americans could significantly reduce personal income tax compliance cost, estimated to be approaching $500 billion per year.  In addition, a flat personal income tax would reduce the costs from both legal tax avoidance and illegal tax evasion.  These costs are difficult to quantify, but could be the highest costs of all.

 With respect to balancing the Federal budget, many are looking at mainly budget cuts, where many believe that additional federal or state revenues can be obtained only through tax hikes.  This is untrue, however, most politicians and many economists believe that a linear relationship exists between tax rates and government revenues.  In the short-run, this may be fairly accurate; however, in the longer-run the relationship between tax rates and GDP growth which is the major factor in government revenue generation is nonlinear.  Lower corporate taxes and a simplified personal tax code will undoubtedly, not only decrease compliance and tax avoidance costs, but also will increase compliance, reduce tax avoidance and potentially grow the economy resulting in significant revenue increases.

 Federal corporate tax rates should be reduced to a globally competitive 17 percent allowing US companies to be more competitive in the global market to attract capital.  A 17 percent Federal corporate income tax rate and, allowing an additional 7 percent state income tax rate, would produce a marginal tax rate of 24 percent (close to the Simpson- Bowles Commission recommendation).  A new tax code should be drafted that would essentially eliminate special loopholes.  A lower tax rate would allow firms to attract and retain investor capital and generate additional capital from retained earnings.  To further stimulate domestic capital investment, firms may be allowed to deduct retained earnings that are reinvested domestically in new capital projects from taxable income.

 Generally, because of a myriad of regulations, the United States is considered to have one of the most unfriendly business environments in the world.  For example, the recently enacted Dodd-Frank Act has a punitive provision that makes corporate officers personally liable for corporate violation if he/she is in a position to detect or correct the violation even if he/she had no knowledge of or participation in the violation.  This new regulation combined with the myriad of previously enacted regulations has the negative effect of reducing desired risk-taking entrepreneurial activity.  Obviously, some regulation of business is required, warranted and desirable; however, excessive and redundant regulation, which exposes corporate officers to unreasonable personal liability, reduces capital formation and job creation.  Thus, all government agencies and departments should be required to perform economic impact/benefit analyses on all existing and new regulations.  Regulations that are deemed to reduce capital formation without significant benefits to society should be repealed.

 The above specific suggestions are meant to provide some guidelines for how to really create jobs and stimulate the economy of the country.  If Congress and the President were to rewrite and simplify the tax code and reduce business tax rates as suggested above and create a more business friendly environment in the United States, there is little doubt that this would provide a signal to the world and to the American people that the country is back in business.

 *Dr. Spahr is a Professor of Finance and former chair of the Department of Finance, Insurance and Real Estate at the University of Memphis.  He is not an Economist, but has degrees in Engineering, Operations Management and Mathematics as well as a Ph.D. in Finance.  He has lectured extensively on this and other topics worldwide.

I hope you will check out future weekly commentary at   If you enjoy the commentary please subscribe online.



Shawn Massey, CCIM, SCLS is a partner with The Shopping Center Group a 3rd party retail real estate advisory firm in their Memphis office, an adjunct professor in the graduate real estate program at The University of Memphis and a co-founder and Chairman of the Board for the Memphis Business Academy charter schools (K-12th grade) in the Frayser area of Memphis.  

For all your retail real estate needs (tenant representation, landlord representation and property, investment & land sales) I hope that you will choose The Shopping Center Group and me to represent you and your business.  We understand that representation is a privilege and that you have a choice!

The opinions expressed in this post are entirely my own.  They should not be considered the opinion of The Shopping Center Group, LLC in which I am associated.

468 ad

One comment

  1. daniel Manzer /

    Sounds great !

Leave a Reply

Your email address will not be published. Required fields are marked *