Will Europe’s Economic Gloom Spook U.S. Economy and Job Growth?

Looking across the pond, we see economies across Europe in decline.

Here in the United States this raises our eyebrows because the European Union (EU) is one of our largest trading partners and their collective economy represents 19.1% of global GDP, which is only second to the U.S.

Looking across the pond, we see economies across Europe in decline.

Here in the United States this raises our eyebrows because the European Union (EU) is one of our largest trading partners and their collective economy represents 19.1% of global GDP, which is only second to the U.S.

Most recently, Germany has revised its growth forecast to a snail-like pace of a mere 1.3% in 2014 and only 1.2% in 2015, compared to previous estimates of 1.9% and 2.0%, respectively.

These numbers are being closely watched because Germany has been the EU’s only real source of growth for the past number of years.

What is the cause of this slowdown?

Many are looking at these debt laden economies and trying to understand why they refuse to recover despite ultra-low interest rates.

Let’s look again at Germany; one interesting calculation is that of their tax revenue as a percentage of GDP. Germany clocks in at 40.6%, while the United States is much lower with 26.9%.

With Germany’s slowdown at the forefront of the minds of citizens and employers alike, EU finance ministers are calling for stimulus spending to revive the eurozone’s sluggish growth.

This begs the question – are the EU policy makers making the right decisions?

It’s important to have a big picture of the situation at hand: these countries are experiencing an economic growth slowdown, just as peoples’ life spans continue to increase, and thus, health care and pension costs continue to mount.

To regain economic traction, economists have recommended everything from lifting restrictions on competition to boosting spending on education, and to equipping workers with the skills to perform higher value-added tasks.

But, what is the right answer?

In exploring this question, the International Monetary Fund performed a decade of research comparing productivity in private sector industries in the world’s major economies, and the IMF concluded that productivity growth is the main source of GDP per capita growth. Furthermore, the key to boosting productivity, and thus growth, is a policy framework promoting competition in all sectors.

Europe has a wide range of obstacles ahead of her in order to increase productivity growth. These problems include unsustainable debt, heavy taxation, and a societal culture of limited freedoms.

For example, according to a Gallup survey, 9 in 10 Italians and Greeks find it difficult to start a business due to government bureaucracy.

What can states here in America learn from the EU plight?

Despite low interest rates to spur economic activity, European countries have continued to burden its citizens with hefty taxes while building a mountain of debt that is placing neck-strangling pressure on their economies.

No amount of short-term stimulus spending will create the long-lasting progress the EU wants without a decrease in taxes.

In Thomas Jefferson’s first inaugural address he stated, “a wise and frugal government, which shall restrain men from injuring one another, which shall leave them otherwise free to regulate their own pursuits of industry and improvement, and shall not take from the mouth of labor the bread it has earned.”

Certainly, our Founding Fathers knew that the power to tax is also the power to destroy.

Keeping with the Founding Father’s original intent, we believe in the principle of limited government, and we believe that government runs most efficiently when it’s lean, providing essential services instead of trying to be a one-stop shop.

Will lower taxes create jobs and spur economic productivity and growth?

A recent study by the Heritage Foundation looked at the rates in which jobs were created in high tax states such as California and New York compared with states with low tax rates, such as Florida and Texas. The result: by a wide margin, the low income tax states did the best in job creation.

In the final report by the bi-partisan National Commission on Fiscal Responsibility and Reform, which was co-chaired by Alan Simpson and Erskine Bowles, contained many bold ideas to rein in the national debt such as lowering tax rates and broadening the base.

Here in Ohio, as an effort to grow the economy and job opportunities, Governor Kasich has offered a two-prong reform plan. To lower the income tax rate while simultaneously broadening the base, and by ending the sales-tax exemptions for many professional services.

Echoing Governor Kasich’s economic policies, we believe that tax rates should be flatter and fairer for all citizens, which will help spur Ohio’s economy forward.

In sum, only time will tell if the EU’s proposed stimulus spending will actually increase productivity or if their economic gloom will spook the US economy, but one thing is for sure – leveling out the tax structure by lowering income tax rates is a trusted and proven method for job creation and growth that American states should follow.

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