Job creation–tax cuts are not the right tool

by Linda Beale

Job creation–tax cuts are not the right tool

Not unexpectedly, the “think tanks” that claim to be nonpartisan but that conduct research sponsored by corporate interests and support “capital market” solutions to economic problems are at it again pushing more tax breaks for the huge corporations that just gained more legislative clout with the Supreme Court’s foolish decision in Citizens United. See, for instance, the Milken Institute’s, Jobs for America: Investments and policies for economic growth and competitiveness (Jan. 2010) (sponsored by one of the biggest of the “bad guys” pushing corporate tax cuts all the time, the National Association of Manufacturers).

The Milken report wants the government to do the following:

reduce the corporate tax rate (The section 199 manufacturing credit–which amounts to a significant rate reduction for most US companies–has already been passed by Congress under the same argument that reducing taxes will result in job creation. but there not much in the way of new jobs to show for the tax reduction; this report claims that reducing the rate to 22% versus the current statutory rate of 35% would cause a .3 percentage point growth in GDP from 2011 to 2013, with an increase in employment of 2.13 million. These sorts of claims are made for all kinds of tax cuts, but seldom pan out in practice.)
increase the R&D credit (we’ve already done that–the R&D deduction was made a credit and it didn’t have a significant impact on job creation. It’s a stretch to think it would, since the research is either going to be done anyway or just tweaking around the edges in ways that doesn’t require significant expansion of research facilities. Most of the basic research done at universities is much more important to the core of job development and innovation expansion.

Let companies export technology products to produce products abroad (that will help overseas job production, but will essentially increase the flow of jobs to low-labor-cost countries and do nothing to create jobs here)
invest in infrastructure projects (now, that one has real potential, butprobably NOT the projects recommended here, which include an expansion of offshore drilling and onshore exploration and coal usage–projects that do nothing to move us towards better use of energy and prevention of global warming).

The Milken report, in other words, espouses many of the same policies applied by the Bush II administration. They didn’t create jobs under Bush and there’s no reason to think they would be more successful now–in fact, we’ve tried tax cuts as job stimulus for years without success. A recent Congressional Research Service (CRS) report notes that business tax incentives don’t do much to stimulate the economy. See Hungerford & Gravelle, Business Investment and Employment Tax Incentives to Stimulate the Economy (Jan. 22, 2010) (available on BNA). The report notes that the February 09 economic stimulus package included $286 billion in tax cuts, many directed towards business, and that the administration has advocated futher business incentives. However, it reports that “the evidence … suggests that a business tax subsidy may not necessarily be the best choice for fiscal stimulus.” It considers, for example, the idea of tax credits–the two most common of which are investment tax credits and accelerated deductions for depreciation. While studies suggest that such credits have some potential for increasing employment, they have not proven to be effective in practice. Reasons for ineffectiveness include the complexity of credits, the uncertainty of credits prior to tax filing time, the lack of awareness about the credit til tax filing time, and the fact that “product demand appears to be the primary determinant of hiring.” Firms may not invest even with investment tax credits, if they are already at excess capacity. In fact, the report notes empirical evidence from recent studies that suggest that the induced spending is less than the cost of the tax subsidy.

Let’s face it. Businesses will always demand tax subsidies, because the managers and owners benefit when they pay less in taxes. But tax subsidies may do little or nothing to stimulate the economy or provide jobs. This CRS report suggests that tax subsidies don’t act as a stimulus for hiring, but rather as just another windfall for businesses. The report notes that to the extent an investment subsidy isn’t used to stimulate investment it may well simply be used to pay down debt or pay out dividends to shareholders.

Programs that create jobs are the ones that directly create jobs–not the ones that just put more money in the hands of already wealthy CEOs and shareholders who will likely sock the money away in some investment overseas. We need to be creating jobs programs like those in the New Deal era–real jobs that can make the country better by building infrastructure and make the lives of the people directly affected better. And we need to be very selective about the infrastructure projects that we fund. Providing additional subsidies to Big Oil and other extractive industries is a 19th century solution to a 21st century problem.

Will Congress be able to do anything other than the bidding of the big corporate interests and their managers and owners–especially after the right-wing Court in Citizens United overturned multiple precedents to find that corporations can spend whatever they want to buy elections, in the guise of claiming that such ill-founded judge activism furthers free speech rights? Will Congress be able to show any concern for ordinary Americans? It seems increasingly doubtful, unless Americans become better informed and able to vote in large blocks to disempower the corporatist agenda. We must remove politicians that simply put in place the policies that the big multinationals want. Those policies almost always will serve the managerial/owner class and not ordinary Americans.
crossposted with ataxingmatter