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
you are absolutely right about this.
tax cuts to spur growth is the “pushing up a rope” theory of economics.
everybody wants a tax cut and can usually think of a good reason why they should get one. but what makes the economy grow is “demand” (pulling on the rope). when demand slacks because people don’t have money or are afraid to spend it we could either just relax and wait for it to come back… this would be fine if the people out of work had a way to survive… or we can spend government money, tax it from people who still have incomes, borrow it from people who have savings, or just print it for the time being to create jobs for people doing the work that still needs to be done.
but America has discovered the way to make itself poor and miserable. just cut taxes.
note that this does not even serve the interests of the ownership class in the long run.
Tax cuts are a euphemism for shifting income to the rich. Most of the cuts help the rich (that is why Bush loved them so much) and have little benefit for the poor many of whom don’t pay taxes at all. The reason they get so much publicity is the plutocratic dupemachine is constantly advocating them because they DO benefit one segment of the population, the rich and the superrich.
Since businesses are taxed essentially on profits (not income, the way individuals are), tax cuts won’t have much impact in a recession (where profits are reduced). Further, businesses can carry losses forward to offset profits (and thereby reduce taxes) in future years, so tax cuts will really only have an actual impact when the economy is booming (i.e., not during the recession). With respect to those businesses that do have profits during a recession, Keynes explained that the psychology in a recession (both businesses and individuals) is to retain money as a hedge against potential adverse events. Thus businesses (including their managers and owners) will retain their tax windfalls — i.e., the businesses will increase their reserves or will pay bonuses (e.g., CitiCorp bonuses of 145% of profits) or dividends, both of which essentially are savings by the managers and owners. That’s why the banks are increasing their reserves instead of making loans to business.
I think you have just offered the mechanism that explains one of the Romer/Romer tax-cut findings. If memory serves, their lit-crit take on fiscal policy (much reviled here) found not that business tax cuts work in general, but that they work near the peak in the business cycle. That is why, as you hint, this form of stimulus works best when needed least. In a perfect world, the Fed would take away the entire effect of the stimulus, essentially forcing the Fed to pay once through reduced revenue, then again through higher borrowing rates.
Oops. Forcing TREASURY to pay once through reduced revenue, again through higher borrowing rates.
I hate to be the party spoiler here (Well not really Ive become quite a contrarian of late) but I DO think tax cuts will help, if directed at payroll taxes. Everyone below 106,000 gets a 15% raise which is the group of people most likely struggling with debt. Any other cuts should be specifically directed.
I agree with your sentiment on just about every issue on this site but I’m not sure you’ve thought through the statement “Forcing TREASURY to pay once through reduced revenue, again through higher borrowing rates.”
The US Treasury doesnt need to borrow from anyone, they are a monopoly currency issuer, and they dont NEED taxes to fund anything.
I’m just sayin
Here is a job creation idea
Sure let’s create a self fulfilling prophecy for those who want to kill SS and MC.
Not to mention the fact the the problem with lack of income to those at the level you set is the lack of income paid for the labor provided. Cutting as you suggest only further shifts the income up the line as those at and below your 106K are giving up their future security for the benefit of the rich to continue driving down the labor costs.
$1.4 trillion dollars in income per year is now in the hands of the top 1% that used to be in the hands of the bottom 99%. You can’t cut taxes enough for long enuogh to make up this short fall in consumption demand such that the wealthy never have to pay it out.
$1.4 trillion is $15,300/family of 4/year.
Agree! It ain’t tax cuts. Just look at the 4th QTR of 2009. GDP rose by 5.7% while job losses increased too. Kool.
What was that 6.8% growth rate after the “blame it on” Bush tax RATE cuts?
since the money is the workers, how does cutting the payroll tax give anybody a raise?
Relieving the families/businesses from paying the payroll taxes does not mean that SS goes unfunded. The govt pays the entire 15%. Yes it adds to the “deficit” but as Ive tried to stress to folks here the deficit isnt a problem until its a problem and we will know when it is. This fighting off inflation before we see it is ludicrous. All we do is keep promoting deflationary policies. There is no financial reason SS/Med couldnt be fully funded by the govt. None at all. I do NOT think anyone should give up any future security.
Usually I follow you pretty well but I must admit I’m stumped here. The money IS the workers?
Everyone below 106,000 would stop getting 15% (or whatever it is now) removed from their check. That 15% would still be “accounted” for by the govt and benefits would still be paid to current recipients at the same level.
Workers get a raise, recipients get their usual benefits.
The workers do not get a raise, they only see the money they already have being shifted to something other than their retirement.
Raising the debt I have no problem with, it’s that for the last 40 years the taxes to pay the deficit have been coming out of the very people you are trying to help.
You can not give people a raise with their own money.
what happens to those workers down the road when they go to collect their benefits?
or do you mean that paying for their premiums out of general funds…. welfare for those who don’t need it … is the same as a raise?
if the idea is to give employers a “tax incentive” to hire more workers, why not just write them a check on the Treasurey and stop pretending that the “payroll tax” has anything to do with it?
The question isnt what happens when they go to collect their benefits, they can always be paid whatever the politics of the day says is appropriate, the question is what will be there for them to consume. We are confusing finance (how will we pay for it) for economics/politics (how do we distribute it) It is clear that politics is reflected in our finances but it does not mean we have to ever allow someone to say “we cant afford it”. If we need it we will afford it. We have no use for saving 7 trillion dollars if we have nothing worth while to consume in 30 yrs. The govt has no use for saving money for a rainy day.
I agree about writing them a check on the Treasury and to stop pretending the payroll tax has anything to do with it. The payroll tax is the political football we are playing with, not a necessity.
Subsidize the jobs you want.
Check out this guys argument and comment……………….. please
“money” is how we regulate “consumption.” it is a huge difference whether i have a legal claim on consumption as opposed to having to take whatever the politicians of the day are willing to give me.
but i agree with you the “we can’t afford it” argument is dishonest and stupid.
Taxes should be dealt seriously especially for businessmen. This is indeed a big factors to consider. Thank you with this post.
2020 Tax Resolution
2 part question;
Isn’t it true, though, that corporations don’t pay taxes per se? They only raise the price of “product” or “commodity” to offset — then, at a certain point, resort to cutting jobs to help “retain” profits?
Is it possible to tax the “income” of the CEO/President/Chairman/ or whatever they would call themselves, and let the corporation keep it’s revenue to create jobs and re-invest (pro-create)?
I ask because it is all so confusing to me, and I feel corporate greed is what is doing us in.
The topic on job creation you have post is too good which is widely required for modern generation.