With President George W. Bush's State of the Union address approaching, Washington wonks are stewing over the year's policy agenda. A look at the latest economic data suggests an obvious change that should have broad bipartisan appeal: a cut in the corporate tax.

The case for a reduction begins with jobs. Because the U.S. economy is growing nicely, almost everyone expected healthy job creation in December. But last week's jobs report showed an addition of just 108,000 jobs, about half the expected number.

One should avoid getting too worked up over any one report. Special factors, such as surging Internet Christmas sales, may help explain the soft retail employment behind the December weakness. But bad job numbers are hardly a new phenomenon.

Economic Policy Institute economist Jared Bernstein estimated on Jan. 6, the day of the employment report, that this is the most disappointing jobs rebound on record. Since the beginning of this recovery, payrolls have increased by 2.7 percent. During the 1991-1995 recovery, they rose 7.6 percent. Employment gained at more than 10 percent in the other postwar recoveries.

Heated Debate

This record has been a point of heated political contention. The bullish camps deny that job creation is sluggish, saying employment is more poorly measured this time around. The bears accept the numbers at face value, and cite the surge in jobs moving abroad.

Neither argument is altogether convincing. The data on off- shoring suggest it's a pretty small part of the puzzle. One recent report projects the U.S. will lose 3.4 million jobs to off-shoring by 2015.

This is a small number in an economy in which about 15 million jobs are destroyed, and more than that created, every year. Moreover, it seems that domestic employment tends to grow more for firms that also expand overseas.

On the other hand, the Labor Department gauge that documents the weak job creation, the so-called payroll survey, has been among the more respected economic measurements in the data universe. While it's not perfect, its value as a barometer is surely not zero.

Relentless Message

It comes as no surprise that economic arguments selected for political convenience are less than satisfying. But it's my belief that the failure of jobs to keep up with the economic recovery has been so relentless it's foolhardy to ignore the message. Job creation is disappointing, and it's time we put aside the blame game and try to figure out why.

Some months ago, I was at a lunch attended by a number of important corporate leaders. I asked how many of them were planning to build a major facility in the U.S. None of them was. I asked how many were planning to expand overseas. Almost all of them were.

The fact is, companies with only U.S. operations have a hard time competing in the global marketplace unless, like Microsoft Corp. or Amgen Inc., they have significant intellectual property that lets them fend off foreign competitors. Businesses that expand overseas gain a competitive advantage by doing so.

Overseas Advantage

Over time, companies with operations abroad have prospered and expanded in the U.S., while those without them have tended to fade away. You can't say that off-shoring is the problem, because companies locating outside the U.S. perform better at home. If we shut off foreign operations, we might well drive many of our multinationals to bankruptcy.

So what explains the advantage gained from locating production overseas?

The most powerful factor appears to be taxes. The U.S. has the highest corporate tax rate among the world's most developed economies. With a combined federal and state tax rate of 39.3 percent, the U.S. taxes corporations at a rate that is 10 percentage points higher than the average of other nations in the Organization for Economic Cooperation and Development.

In a world of tight margins, a 10-percentage-point disadvantage is humongous. And the U.S. rate is well above that of countries such as Ireland, which has enjoyed an economic boom that coincided with a reduction in corporate taxes to 12.5 percent.

Let's Do It

When companies locate offshore, they can transfer much of their profits to foreign subsidiaries. Thus they avoid U.S. taxes until that time in the distant future when they ship the money home. This helps U.S. companies stay competitive vis-a-vis those already located in low-tax countries. It doesn't create many jobs in the U.S.

This is hardly a partisan issue. Indeed, Democratic Senator John Kerry wisely included a reduction in corporate taxes in his 2004 presidential platform.

Congress should adopt legislation to lower the tax, and the president should push for the move in his State of the Union address later this month. Unless we make a concerted effort to reduce the rate to something comparable to that of other developed nations, we can expect more bad jobs reports.

Kevin A. Hassett is a resident scholar and director of economic policy studies at AEI.