Corporate Tax Cuts Don’t Mean More Jobs

This NYT article is right, but I think the explanation is simpler. Companies don’t hire because they have extra cash. They hire because there is unmet market demand such that hiring in the short term makes them more profit in the longer term. If the demand is there, most businesses would borrow to hire. At present, and for the last many years, consumer demand is low while corporate cash reserves are high. Do the math. Jobs aren’t there because demand isn’t there. Period.

The standard trickle-down argument says that once companies start hiring, they will put cash in workers pockets, who will then drive up demand. And sure, that would work… if lots of companies hired. But this scenario leaves out some crucial detail about how this has to work. To restate the process:

  • Companies have to hire workers they don’t need.
  • Enough companies have to do this that the collective new workers’ paychecks stimulate demand across the economy.
  • Then (and only then) does the demand materialize that justifies having hired the workers in the first place.
  • And even after all this, each company is risking that demand will materialize in their particular market. Some of them will be wrong.

Having spent the last 3 decades working in management for and with many companies, I can assure you that very few businesses would take this risk absent some significant exogenous incentive. It’s just not going to happen.

34 thoughts on “Corporate Tax Cuts Don’t Mean More Jobs

  1. Any company or entity has practically an infinite number of projects they can invest and the bigger ones probably have hundreds that they have analyzed. Imagine the risk adjusted predicted returns off those projects graphed. I’m guessing it would approximate a normal curve. Most projects at the right hand side of the tail that are predicted to be wildy profitable are attempted. The vast majority of projects, say from 1 sd to the right of the median to the left tail are forgotten. But from 1 sd to the right to 2 sd’s to the right you have projects that are borderline. Any shift in the parameters that are more favorable to business (including lower taxes) is going to push some of those projects into the doable range. So each company does 5%-10% more business and hires 5%-10% more workers. The economy gets incrementally better. All economics is on the margin.

  2. Ok, I get your point. But business doesn’t actually work that way in general. Marginal projects don’t get shelved because of lack of cash. They get shelved because they’re marginal and Shareholder’s would rather have dividends. Not to mention, there are lots and lots of companies currently sitting on lots and lots of cash. If these projects were just waiting for funding, they’d already be off the shelf.

  3. Further, none of this addresses the demand side. Sure, some of these projects might be to increase profit margin on existing products. No demand change needed for those. But if I’m going to sell more widgets or a new kind of widget, I need demand. Adding a cash infusion to a business doesn’t change the market in a direct enough way to justify the investment.

  4. What demand are you talking about? Aggregate demand? That’s the sum of individual demand curves. Curves. To say there is no demand is nonsensical.

  5. Most companies have a minimum ROI that they expect to get from their projects. Any change that makes investment money cheaper to get is going to move some of these projects into the doable range. A change in the initial conditions can mean that a marginal project isn’t marginal anymore.

  6. What do you have to support this theory that the demand curve for products across the board in the US is such that they won’t invest in new opportunities. Any indicator I’ve seen that would give me some indication of this is fairly positive. I would argue that if someone believes they have built a better widget, they don’t care about the incremental demand. They are going to take business from the current manufacturers.

  7. The issue is that the growth projected by Corp tax cuts comes from the $$ the new employees inject into the market. That’s where the incremental demand comes from. But the demand doesn’t materialize from one’s own employees. It comes from the aggregate of all the new employees. So lots of companies have to make this investment for many of them to see the demand show up. That’s a pretty indirect relationship to get any one company to invest.

  8. If latent demand was there, but I lacked the capacity to produce goods, or if I knew how to cut my costs to take market from my competitors, those projects would largely be funded already. Most big companies are not presently cash constrained. I would already have the capacity to invest in things I was pretty sure would make me money.

  9. Your analysis is a good rebuttal to people who claim employers can increase their business by paying their employees more, but it doesn’t apply here. Nobody thinks this process starts out with employers hiring people they don’t need. Incremental changes in the environment will produce incremental changes in the equilibrium. If you want to argue that the results aren’t significant or worth it, fine. If you are arguing that it doesn’t happen, thats just some weird shit and we’ll have to agree to disagree.

  10. I’m not arguing that cash infusions through tax reductions wouldn’t cause a change in the businesses. But the standard line on why we need to spend this money is because it will create jobs, jobs, jobs. For this to be worth it, the job creation has to be significant. Stimulus should see a solid economic return. Otherwise you’re just handing out cash. What I’m saying is there is no direct line causality between injecting this cash and seeing companies hire more or raise existing wages. There aren’t solid data correlations for this effect either. Do we need tax reform? Sure. Will dropping the tax rate result in a boon to consumers through jobs and wages? Highly doubtful. If anyone wants to argue it will, I need someone to connect the dots for me to explain how that works.

  11. I’m not remotely defending the current tax policy. I rather like the idea of a consumption tax or VAT type model. My only point is that cutting corp. taxes doesn’t lead to significant economy boosting job creation. There may be lots of other good reasons to restructure taxes. This just isn’t one of them.

  12. Economic Effects of Replacing the Corporate Tax. Abolishing the corporate tax produces permanent economic benefits.
    •The capital stock would increase by one-fourth to about one-third (23 percent to 37 percent) — with most of the added investment reflecting capital flowing into the United States.
    •Real wages would rise 12 percent to 13 percent.
    •Gross domestic product would rise 8 percent to 10 percent.

  13. I haven’t studied it in detail, but the stock going up makes sense. I don’t see why actual wages would go up. But there could be factors that tweak other levers that cause effective purchasing power or disposable income to go up. If that’s the real wage they are talking about, then maybe. It depends on where you recover the tax revenue from. And I don’t see why GDP leaps. The article doesn’t seem to say why any of this stuff happens. Just that it will.

  14. No, but okay. It makes the assertion “Higher capital per worker means higher labor productivity and, thus,
    higher real wages.” As this is your reference, please translate that and explain why that extra capital gets spent as increased wages (presumably in after the new wage tax dollars).

  15. Higher real wages means you can buy more goods and services with your wage. Higher productivity I would translate to mean more product for the same cost to the producer. So basically you are changing the supply curve, shifting it right. That is, for any given price, producers will produce more widgets than before. When you shift your supply curve right, the intersection with the demand curve moves down (lower prices) and to the right (higher quantity consumed). When the consumer can purchase more of something for less money, he/she has higher real wages. That is higher real wages, not for the employees of the widget company, but for anyone who purchases widgets.

  16. Thanks. So this is confirming my earlier supposition. Wages don’t change, but the purchase power does. I’m still unclear on why tax changes have this effect. Why does it drive a productivity change? Either way, it’s not an assertion that it drives job growth. But as I said before, there may well be other economic benefit.

  17. Do you really think if everyone’s real incomes went up by 10% that everyone would increase their savings by that much? I think an increase in real wage does imply an increase in jobs. People would more disposable income which would fuel new businesses.That is the increase in demand you are looking for.

  18. Ok. Fair point. That likely would drive demand, which could in turn drive job growth. So… I guess we now have to understand why tax code changes drive productivity. Do you?

  19. What do companies do with profits? Pay taxes, pay dividends, reinvest in the company or sit on it. The issue the study is emphasizing is that global companies are more likely to reinvest their capital where the tax rate is lower so they get more capital reinvestment and less taxes for their money. Lowering the tax rate in the US will induce more capital investment in assets in this country and more productivity will result. Also, there is the not insignificant amount of money payed to corporations and lawyers to avoid taxes that is totally unproductive as far as adding to the utility of the country and could be freed up for more productive purposes.

  20. Curiously, this kind of loops us back to the start, where I’m not sure the theory comports with reality. The theory is contingent on companies sitting on all these viable projects they just don’t have funding for. In such a world, yes, suddenly having more operating capital would see the launch of lots of new business opportunities. But lots of larger companies have seen huge cash boons over the last decade. They are sitting on lots of the stuff. The point of the original article is that by and large what they are doing with the cash is buying back stock, compensating executives, and paying dividends. None of this has the desired economic growth effect.

    My personal experience is that making business cases to execs is difficult. Especially with large companies, they are risk averse, regardless of the amount of cash on hand.

    So yes, I get the theory. I just don’t see any indication business actually works the way the model predicts.

  21. So in your world, if you look at all the capital investment in the world, exactly none of it is diverted from the US because it has the highest tax rate. Of all the US companies, exactly none of them will invest more money into the company if they have more. There is no such thing as a cash strapped growing company and all companies have infinite resources to get the funding they need. And no international company would repatriate any of the money and invest it in capital if given the chance not to lose 35% right off the bat.

  22. Stop it. You’re playing at reductio ad absurdum, and you know it doesn’t work that way. For corporate tax cuts to be effective policy, it has to influence most of the players in the desired direction. That it might help a few is nice for them, but generally a lousy return on our investment as a society. There would be better ways to use the money.

    I spent years working on business cases for offshoring operations for different companies. Tax rate never came up as a factor. Remember, the effective rate most large companies pay is nowhere near 35%. The US is a top destination for foreign investment. Companies (by and large) are cash rich now, and have been for most of the last decade. And there are other ways of getting foreign profits repatriated other than slashing domestic rates. Many of these are not permanent conditions, and certainly there are companies that are exceptions to the above. But cutting tax rates in the current economy doesn’t get you the aggregate boost in jobs its purporters claim.

  23. I know it doesn’t work that way? Everything I know tells me it doesn’t work the way you are claiming. I think you are in denial. I think corporate tax rate cuts affect all corporations. I showed you a study from a fresh water economist saying it would increase GDP 8-10%. An increase of 2% would be huge. What you are claiming is that corporations across the board have 0 marginal propensity to invest. That is absurd. You say its hard to make cases to the business execs, which I take to mean that they turn down lots of viable projects, and yet you don’t think these projects exist. I don’t care if tax rate never came up in the cases you worked on. Maybe somebody else does the calculation. Maybe they compare projects of similar tax treatment together so they don’t need to do the calculation. Or maybe it’s already baked into the ROI they expect on offshoring projects. To indicate it’s not a factor is crazy. I can’t find the link at the moment, but I read (since we started this discussion) someone claim that companies must use 35% tax in their calculations, even though they usually don’t pay that, because they might wind up paying that for that project. How is US is being a top destination for foreign investment relevant to the question of whether there would be more investment if the US didn’t have the highest tax rates? If there is such investment under adverse conditions, I expect it would be a lot higher under favorable ones. Please post some link that supports your assertion that most companies are cash rich right now; domestically cash rich that is. Everything I’ve found talks about cash rich companies that haven’t repatriated the money, which is a data point in my favor, not yours. If you want to make spurious claims that corporate tax cuts have lousy return for society, do some analysis. Give me a starting point. Tell me how much the government spends to enforce the tax code. Show me how much corporations spend avoiding the tax. (This is all wasted money that does not add utility for society. ) All to get what, a real tax rate of 10%? How would cutting it to 10% and reducing the wasted money on both sides not be a better return on investment? I just don’t think your assertions reflect reality.

  24. What I’m assuming you know doesn’t work is making reductionist arguments at the extreme. I’ve never asserted there would be 0 benefit, or that there would be no reinvestment. Further, I’ve never argued foreign profits shouldn’t be repatriated or that that the tax code shouldn’t be simplified and have loopholes closed so that the actual and effective rates were closer. What I’m asking you to stop is asserting I’m claiming things I’ve not said. That doesn’t seem unreasonable. My claim here is only that reducing corporate taxes won’t result in an economy changing boon of jobs or higher wages.

    Your fresh water study assumed that taxes were reformed such that tax revenues remained constant. I’m not sure I believe their numbers (8-10% GDP growth is huge), but directionally, I’m in favor of tax reform and simplification. I think taxing income is too complicated and it has spawned an army of accountants, lawyers, and gov’t agencies that are pretty much wasted money. I don’t think we’re disagreeing on any of that. But I also haven’t seen any real-world proposals for tax reforms that come anywhere close to this.

    What passes for tax reform inevitably manifests as rate cuts resulting in lower tax revenue. The net for companies isn’t a change in incentives, it’s “Here’s more cash”. My point is that absent any change in incentives or the market, there’s not a good case for executives to spend that windfall on new factories, new product lines, or other economy boosting investments as opposed to stock buybacks, bonuses, and dividends. Once you start futzing with other levers, then the incentives and the business cases change. Note that I’m not saying none of the money will be spent usefully, but for this to an economy changing program, most of it needs to be.

    My personal experience, the article that started this whole thread, and the state of Kansas all stand in testament to the real world not bearing out the economic theory that these cuts produce job growth. There are ample models both for and against tax cuts as an economy booster. But corp execs don’t read economic papers. Their decision making process is pretty simple and often pretty short term focused.

    Again, I’m not at all saying there aren’t ways to incent investment or that the current tax structure is doing the economy any favors. Only that simply slashing rates doesn’t yield the desired effect.

  25. Companies invest in themselves. If they have more money, some of it will be invested. I have no idea how much, you have no idea how much. To state authoritatively that tax cuts won’t lead to jobs on the evidence you have is just wrong.

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