It’s called, per Carter Wood, a retained earnings tax. The liberals feel that America’s businesses aren’t spending enough, and the nation’s banks aren’t lending enough, and so want to tax them into compliance.
The administration wants to persuade U.S. companies to unleash some of the $1.93 trillion in cash and other liquid assets in their treasuries. Cash as a share of total assets is at the highest level it has been in a half-century, the Federal Reserve said last week. Mr. Obama wants the nation’s biggest companies to invest that money in expansion and new hires in the U.S. But business leaders are slow to do so, in part due to uncertainty over taxes and coming regulations connected to the health-care overhaul and other initiatives.
I agree that we’ve got to get businesses and banks investing again, but rather than punishing these organizations for not investing why don’t we remove the obstacles that are stopping them from investing of their own free will? As the Journal notes, one of the biggest inhibitions to investment these days is uncertainty. Businesses that would hire have been uncertain as to how Obamacare will be structured for their employees and how many weeks of unemployment benefits they’ll be on the hook for. With the Bush tax cuts in flux, the tax rates for the coming years are uncertain as well.
These are major factors in determining the profitability of any given economic investment, and they’re just a few examples. If the government truly wanted to spur investment they could reward investment with lower taxes and less red tape as opposed to punishing non-investment.
And besides, a retained earnings tax has a pretty sketchy history in the US going all the way back to FDR who tried the same ploy:
In 1935 he signed legislation known as the “soak the rich” law. FDR, more radical than Obama in his class hostility, spoke explicitly of the need for “very high taxes.” Roosevelt’s tax trap was the undistributed-profits tax, which hit businesses that chose not to disgorge their cash as dividends or wages. The idea was to goad companies into action.
The outcome was not what the New Dealers envisioned. Horrified by what they perceived as an existential threat, businesses stopped buying equipment and postponed expansion. They hired lawyers to find ways around the undistributed-profits tax. In May 1938, after months of unemployment rates in the high teens, the Democratic Congress cut back the detested tax. That bill became law without the president’s signature.
This is a bad idea. Let’s hope it’s time hasn’t come again.