Tuesday, August 16, 2011

The Myth of Cutting Corporate Taxes

So I'll be honest, I did not listen to or watch the debates the other night on Fox.  I feel like the entire thing has been brought to hysterics and over the top antics trying to gain the apparent strength of a tea party inspired electorate.  Even the people I would consider listening to have chosen to pander to irrational.  That being said, my news feeds have been filled with sound bites and commentary.  Most were silly, at times comical, claims of purity in the small government except to enforce morality hypocrisy.  However, one bit stood out to me and reminded me of the sad state of politics in this country.

The claim is that corporate tax cuts will create jobs in the US.  I'm not sure who was the first to make the claim, but I am sure it was recited over and over in each persons "authentic" tone.  Please understand, I am not an economist and my research lately has been limited to years of following the process and what late night scrambling I can manage to fit in after dinner.  However, it seems rather obvious that these claims are just flat wrong. So let me try to elaborate on exactly what is wrong with this claim.

 The Rhetoric
The first thing to get out of the way, is to answer the why.  Why make these claims considering the growing concern in this country regarding political corruption and class divisions?  The answer is simple, they are appealing to the base and core needs of their constituents.  People feel fairly helpless in this country.  When supposedly smart(er) people stand up and tell us that the big machine needs you to sacrifice more so it can give you (fill in the blank), we, as a general population, accept it.  Those that lean right (or lately full on roll on the right side), are attracted to the big button items that fuel their platform, i.e. small government.  (Same for the Lefties, don't worry, I'm not that biased).  Let's be frank, the Republican party is and has been, as of late, incredibly effective at convincing the American public that all corporate welfare is to the benefit of all.  Trickle down economics, even if not in name, has been fairly well embedded into the economic debate, despite never having made any real proof of concept.  Don't get me wrong, I am a good ol' capitalist just like the next guy and there is certainly some validity in the notion that strength in large corporations equals some real strength in the US economy.  However, to take this much further requires deep consideration that is not only lacking in debates and speeches, but, quite frankly, behind close doors.  Combine this premise with the rhetoric of jobs and you have a platform, a talking point. 

The Problem
Ok.  So what is wrong with the proposition that cutting corporate taxes leads to job creation?  To me the problem fails at two points, the disconnect between "corporate America" and the real small business and misconception of revenue retained through tax cuts being allocated to hire more employees. 

First, there was a brilliant move by the right in the last few years to attach the concept of "small business" to corporate America.  The logic is simple, every mom and pop outfit doing business correctly is a corporation (or LLC or something similar).  As "corporations" they have a shared interest in corporate tax codes etc. Thus when there is a discussion about raising corporate tax rates, it is easy to say "and that includes you Main Street mom and pop store."  This is so obviously exposed when you consider the "definition" of small business.  According to the SBA website, this means many things.  For example, in the manufacturing sector, anything less than 500 employees, in the retail sector, anything less than 100 employees.  These are pretty big numbers when we are talking about the public perception of small business.  There is a big difference between the perception of small business and the actual application of the definition.  It is a very sly slight of hand to relate a struggling landscaping company with Exxon-Mobile because they both have Inc. after their name.

Second, utilizing the misconception of tax savings and job creation.  Political debate always boils down to generalities. For example,  tax cuts = more revenue = more jobs.  This is easier to say than the very complex truth of these things.  Tax cuts for who?  How big are the cuts? How are those additional revenues allocated?  What kind of jobs are being created?  The reason this is important is that the biggest fallacy in the tax cuts = more jobs scenario is that jobs are not over seas because of our tax system.  They are over seas because of our labor system, our cost of living, and the American way lived by all our citizens. 

Consider this very simple comparison and no please don't bother telling me all the minute details of why it is wrong.  (It is simply to make a point and your knit picky analysis is not going to double the numbers or even add 50%.)  A company with revenues of $500k (after taxes) a year gets a 3% tax cut, that is $15,000.00.  There is no way that this company creates a "job" out of the tax savings.  I know, I know, "but the that $15k not going to the government and is going into the economy".  But the claim is jobs, how many jobs is that $15k going to create back in the wild?  And in this economy, is it really going to be spent?  Ok so let's up the ante.  Now our company has revenues of $500m post taxes.  The same 3% tax cut is applied, and wow $15m in savings.  Now we are talking jobs, right?  I mean, that's almost 300 hundred jobs based on median income in the US.  Wrong.  You see the problem is, increased revenues do not equal jobs as a blanket rule.  Moreover, there is no way of guaranteeing and jobs created will be created in the US.  Manufacturing did not move jobs overseas because of tax consequences (there are plenty of ways to avoid taxes and remain a US based company, see Google).  The biggest savings oversees comes in the form of labor.  There is also the logistical benefit of being where other parts and accessories are being manufactured.  So what would a company do with $15m in savings?  Well, it depends.  Unless you are willing to incentivize actual job creation (through additional tax savings or training grants paid with tax payer dollars) or something short of outright telling a private company what to do with their money, no one can honestly make this claim.    

We need to stop following the simplistic A to B rhetoric and try to really make sense of what we want and how we get there.  The more we cheer these one liners, the more we will steer ourselves astray. 


  1. Jon Keim16.8.11

    Way to go Will R. A good slice of rational thought. I will re-post for all the rest of the world to see (smile).

  2. Thanks Jon. Now I have to go fix all the typos. oh wait it's the internet nobody checks for those. ;)