Naked Capitalism on the Myth of Lower Tax Rates

New Study Confirms That Lower Corporate Tax Rates Don’t Create Jobs

Corporate executives love to peddle the notion that they need to have their low tax payments reduced even further, even as the share of GDP represented by company profits is at unprecedentedly high levels. In fact, corporations paid between 5% and 6% of GDP in taxes in the early 1950 versus a trivial 1.3% in 2010. The GAO reported earlier this year that the effective Federal tax rate paid by large corporations in 2010 was 12.6%, versus a nominal rate of 35%. And roughly 10% of large companies pay no Federal tax at all.

One of the arguments made by big companies in favor of making their low payments even low is that they’d go out and create more jobs. This is clearly spurious. Large companies are already awash with cash, thanks in no small measure to taking advantage of the Fed’s largesse and issuing bonds. They could invest and create jobs with the dough they already have if they were so inclined. But in fact, large corporations have been shedding jobs for some time, since Wall Street reacts positively to downsizing and higher stock prices lead to bigger executive pay packages. And don’t blame the crappy economy. Big companies weren’t investing even in the last expansion; they had abandoned the role of capitalists and were net saving. Large companies have been more keen to buy back stock than invest in the business of their business.

Tax maven Linda Beale today recaps this argument and summarizes new supporting evidence in the form of a study by the Center for Effective Government. As Beale reminds readers,

I’ve argued frequently in the past that there is no there there–i.e., that lowering corporate tax rates will do nothing to create jobs. Instead, I’ve said, it will simply deliver an even higher profit margin to be skimmed off by the highest paid executives and, possibly, shareholders. The higher profit margins are unlikely even to be used to increase workers’ shares of the corporate revenues through higher wages, a place where they could most help the economy other than new jobs created. Thus, the drive for “revenue neutral” corporate tax reform (cut corporate taxes, cut expenditures elsewhere to make up for the decreased corporate tax revenues) is just another example of corporatism as an engine of the modern form of US class warfare.

And why is Beale so confident in her view that corporations will take the funds saved through tax breaks and dispense it in dividends and higher executive pay rather than hiring staff or reinvesting? Because every time the US has done that, it’s precisely what happened. As tax expert Lee Sheppard wrote in Forbes:

Even if Congress naively were to believe that tax-free repatriation of untaxed foreign profits were a good idea, we’ve been there, done that, and got bike oil on the T-shirt. In 2004, Congress granted a tax holiday, and companies with big stashes of offshore profits attributable to valuable intangibles—that’d be pharma and tech—repatriated billions of dollars in the form of dividends and executive bonuses.

The Center for Effective Government study, The Corporate Tax Rate Debate: Lower Taes on Corporate Profits Not Linked to Job Creation, is particularly damning. It shows that small businesses, who have long been the engine for job growth, pay more in taxes than their grousing big company brethren, an average rate of 19% when you include Federal, state, and local versus 16.9% for the big boys.

But even more telling is that among the 60 large companies it examined in depth, tax payments are if anything negatively correlated with job growth. Beale’s recap:

The study, for example, found that a supermajority (22) of the 30 corporations paying the HIGHEST tax rates created 200,000 jobs between 2008 and 2012, while only 8 of those 30 had any reductions in the number of employees. In contrast, the 30 profitable corporations paying no or very little taxes in that period had an aggregate loss of more than 51,000 jobs–half created a few jobs and half reduced jobs between 2008 and 2012.

And the report also points out that the revenue loss from giving companies tax breaks is significant:

In 2012, U.S. corporations reported earning nearly $1.8 trillion in profits. Had they paid the 35 percent tax rate on those profits, total corporate tax receipts would have been $630 billion (rather than the $242 billion they actually paid), and the deficit would have been reduced by nearly a third.

And please, spare us the other intelligence-insulting lobbyist argument for more tax gimmies, “taxing corporations is unfair because those poor investors would be taxed twice.” Everyone is taxed multiple times, so stop running the canard that investors deserve to be a protected class. Workers pay FICA and income taxes, which means sales tax payments come out of income that has been previously taxed. You also pay the real estate taxes of store owners when you buy goods or eat out. You pay the gas taxes on the shipping costs of products you buy online (again out of your after tax dollars!)

Citizenship carries obligations. Corporations have managed to secure the advantages of personhood, so they need to live up to the other part of the deal and pay their fair share. Anything less is just another form of corporate welfare.


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