Why Are We Talking About Corporate Tax Cuts?

I am not an economist.  I never had the opportunity to doze off in an Econ101 class.  I do not possess profound insights into the U.S Tax Code or its effects on market forces.  I am, however, intelligent enough to realize that the Republican tax plan is not what they’d like us to believe it is; that slashing corporate taxes and providing the already wealthiest among us with a substantial tax break will somehow fatten the wallets of working-class families thereby reviving the middle class.

The basic theory goes something like this:  Company pays less tax – company’s capital increases as a result – company uses this additional capital to upgrade or invest in new equipment or expand its operations – company hires additional labor causing a decrease in the available labor pool – wages rise as a result.  This is the flawed logic of “trickle down” economics.  Been there, done that, doesn’t work.

The plan would reduce the current 35% statutory corporate tax rate to 20%.  Most, if not all, of the large corporations pay a considerably lower effective tax rate through depreciation, loopholes in the tax law and (possibly) some creative accounting practices.  U.S. corporations are currently paying an effective tax rate of somewhere between 18%-24% depending on the source.  I’ve seen a few that say it’s even lower than that but let’s assume that, on average, it falls right in the middle at 21%.  That’s 60% of the current statutory rate.  If that statutory rate is slashed to 20% and all other factors remain static, those corporations will have their effective tax liability reduced to just 12%.  They’ll be rolling in cash.  Oh, wait…they already are!

According to research from Capital Economics, American companies are holding about 2.6 trillion dollars of profits overseas to avoid paying tax on it.  It’s estimated that about half of that is cash held in foreign bank accounts.  The Republicans have made vague references to a tax “holiday” as an incentive to entice these companies to repatriate these funds at an as yet undefined reduced rate.  In 2004, the Bush administration granted a similar tax holiday at a 5.25% rate.  Approximately 360 billion dollars was returned to the U.S but most of that was used to buy back stock or went to shareholders in the form of dividends rather than capital investment.  And it didn’t create jobs.  The non-partisan Congressional Research Service reported that many of the largest beneficiaries of the holiday actually cut jobs in 2005-2006.  What reason is there to think another tax holiday would produce different results?  More to the point, this would seem to negate the aforementioned “company uses this additional capital…” logic, resulting in no new hiring or wage increases.  Corporations, execs and shareholders 1, workers 0.

As I see it, the primary flaw in the conservative logic is the assumption that companies aren’t investing and creating jobs due to a lack of funds to do so.  The stock market is soaring and companies have been reaping record profits so it would seem there should be plenty of capital floating around looking for someplace to land.  The problem is that simply having a pile of cash isn’t, by itself, reason enough to expand the business and create jobs.  There must first be demand for the products or services the company provides.  Widget Corp is not going to build a new factory and hire more widget makers unless their current production cannot meet consumer demand for widgets.  We live in a consumer driven economy and if we aren’t consuming enough, companies have no reason to expand.  Increasing their available capital through a tax reduction does absolutely nothing to spur demand for their product so there is no reason for them to expand.

Furthermore, no company is going to raise wages simply because they have the cash to do so.  Far from it.  Can you say “fiduciary responsibility to the shareholders”?  Labor is an expense, no different from the costs of equipment or raw materials.  The goal in any business is to keep costs as low as possible in order to maximize profits.  The company is as likely to dump extra cash into their existing labor force as they are to offer to pay a supplier a higher price for raw materials.  It’s simply not going to happen.

All of this leads me to believe that the “economic growth” Republicans assure us will result from this tax cut will ultimately end up lining the pockets of CEO’s, corner office execs and shareholders.  Corporations, execs and shareholders 2, workers 0.

The Republicans have said this plan has been designed to relieve the tax burden on middle-class America.  In October, touting “the biggest tax cut in our history” (which it’s not), Trump claimed it would increase average household income by $4000.00.  House Speaker Paul Ryan raves about the $1182.00 tax cut the typical middle-income American family will receive and goes on to say, “The entire purpose of our plan is to cut taxes for hardworking middle-class families.”  Sure it is.  That’s why, according to the Tax Policy Center, many millionaires will be deciding how best to invest their five and six-figure reductions while I’m trying to figure out the best way to stretch my $1182.00.  Thanks for your generosity, Paul.

Trump and his economics witch doctors are attempting to sell working Americans a windfall for the already wealthy disguised as a boon to the middle class.  It’s time to remind our Senators of their fiduciary responsibility to the nation.  Let them know that a vote for this tax plan is an indication of their desire to retire from public service at the end of their current term.

 

SOURCES

https://www.treasury.gov/connect/blog/Pages/Just-the-Facts-The-Costs-of-a-Repatriation-Tax-Holiday.aspx

http://www.factcheck.org/2017/11/gop-democrats-spin-tax-plan/

https://www.speaker.gov/general/typical-families-will-see-1182-tax-cut-under-tax-cuts-and-jobs-act

http://www.taxpolicycenter.org/taxvox/houses-tax-bill-would-cut-taxes-mostly-highest-income-households

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