Are Corporate Tax Cuts Good for Labor? (Sep. 6)

This afternoon in Bismarck, North Dakota, exactly a week after a similar speech in Missouri, President Trump gave yet another pitch for the GOP’s forthcoming tax reform plan.  Last week’s campaign-style rally had the added appeal for Trump that he could “lobby” Missouri Sen. Claire McCaskill, an in-cycle moderate Democrat, urging voters to throw her out of office if she opposes the plan.   

This time, North Dakota Sen. Heidi Heitkamp, another Democrat up for reelection next year, appeared willingly with Trump on stage in her state, which Trump won by 36 percent.  Otherwise, the two speeches barely differed and no new light was shed on the administration’s long-awaited tax plan. 

Today we look at a claim Trump made in both speeches, that workers would benefit from corporate tax cuts, which in theory would enable firms to hire more workers and raise wages.  Should manufacturing workers in Missouri and farmers in North Dakota be clamoring for corporate tax relief?  See below.  

Best,

Dana 

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Resurrecting Trickle-Down

Mr. Trump’s pitch lacked specifics, but some highlights have remained constant, namely the argument that slashing the corporate tax rate by more than half (from 35 to 15 percent) “means higher wages for American workers.”  The argument goes, as trickle-down economics has posited for decades, that pouring money into the pockets of investors and CEOs yields investment in more and better paying jobs.

U.S. Corporate Tax in Context

Trump claims that American companies pay the highest taxes in the world, or as he put it, “dead last” and “in some cases way above 40 percent,” retarding job creation and wage hikes.  The effective U.S. corporate tax rate — the rate that applies after credits, deductions, deferrals, and any of thousands loopholes are claimed — is squarely in the middle of the pack internationally.  In the global context, American firms win roughly as much as they lose in global competition due to the U.S. tax regime.  

The question then becomes one of corporate finance strategy.  When firms receive substantial tax cuts and see the boost to profits Trump promises, do they hire more workers or pass the gains along to their workers in higher compensation?

The simple answer is no.  

•  Manufacturing — In 2012-13, Whirlpool leveraged a $1.8 million dollar lobbying expense into tax credits totaling around $120 million.  This massive injection of cash continued Whirpool Corporation’s recent history of negative income taxes after having paid negative $531 million foreign, federal, and state taxes between 2009 and 2011.  Whirlpool laid off 5,000 workers exporting their jobs to places such a refrigerator factory in Mexico during that time.  A retroactive tax credit resulting in inflated profits and negative tax rates is exactly the kind of windfall Trump aims to deliver to corporations with his tax plan.  So why does he believe it will keep jobs from heading to Mexico this time around?

•  Banking — In 2008, many of the largest investment banks had to be bailed out in the Troubled Asset Relief Program (TARP) to stop the market’s tailspin. That $700 billion given to failing investment banks turned into bonuses for their traders and executives.  Roughly 5,000 traders at nine of the banks that received these funds were paid bonuses of more than $1 million each in what was the most painful year for the markets since the Great Depression.  All told financial institutions paid out more than $20 billion in officer bonuses while the economy collapsed.

•  Tech Sector —  Not to be outdone, the telecom giant AT&T stood out in a recently-published study of 92 S&P 500 companies that turned a profit every year from 2008-2015.  During that period, AT&T paid an effective corporate tax rate of 8.1 percent while simultaneously cutting nearly 80,000 jobs.  This while the company paid itself and officers $34 billion through stock buybacks; CEO Randall Stephenson more than doubled his salary.  

Tax Cuts = More Jobs?       

 

Despite President Trump’s claims, it is unlikely that corporations would use the extra cash gained from corporate tax cuts to fund job-creating and wage-growing workforce investment.  Historical analysis by economists at Cornell Universityand University College London found no evidence that corporate rate cuts have had any significant impact on employment in the post-war era.

This supports more contemporary analysis performed by the Institute for Policy Studies (IPS), which examined 92 publicly-held corporations with effective corporate tax rates of 20 percent (the rate proposed by Congressional Republicans).  Instead of being strong job creators, these companies had a median job growth rate of minus 1 percent  and shed hundreds of thousands of jobs between 2008 and 2015.  Further, Trump’s argument seems to rest on the dubious assumption that U.S. corporations are hurting for investment capital.  This flies in the face of their record profits, imountains of cash, and cheap capital abounds.  

Nobel Prize-winning economist and Columbia Prof. Joseph E. Stiglitz said that Trump’s claims are gross overstatements.   He was unequivocal, telling the New York Times that there is “no evidence that cutting tax rates stimulates more investment” of any sort, whether in plant, equipment, or labor.  

Corporate Finance in Practice 

In fact, closer examination of corporate finance trends suggests a far different set of spending priorities from those assumed by supporters of the claim that corporate tax cuts benefit working men and women.  

Over the past several years, U.S. firms  have spent trillions of dollars benefitting shareholders through stock buybacks and dividends.  Stock buybacks were once a relatively modest part of corporate finance, but in the early 1980s, the rules governing stock manipulation were relaxed by the Reagan administration.  At roughly the same time, American CEOs were increasingly began to be paid more customarily with company stock, a move thought to better align them with the interests of their shareholders.  

The result has been a massive shift in the flow of corporate profits from the real economy (such as workforce and infrastructure development) towards the financial economy.  Between 2003 and 2012, for instance, 54 percent of the earnings realized by companies on the S&P 500, $2.4 trillion, went toward share repurchases and an additional 37 percent went to dividend payments.  In the first half of 2016 companies spent 112 percent of their earnings on buybacks and dividend payments, a process facilitated by borrowing in the post-2008 low interest environment.

This amount of cash directed at shareholders leaves that much less for workforce development or productive investment.  It is a dubious, therefore, for the president makes that a significant corporate tax cut would spur the kind of job growth that record public profits have failed to produce over the last several decades.  What is more likely, as with Trump’s other proposals, is that slashing corporate tax rates will benefit the shareholders and management at the expense of working families and the middle class.

Alternative Tax Reform

This is not to suggest that well-honed tax reforms could not spur job creation and help generate tax revenue for public infrastructure spending that creates jobs directly.  Initiatives could include:

•  ending the double taxation of corporate dividends and eliminate the business deduction for interest

•  eliminating the deferral of tax on foreign profits

•  barring sham corporate “inversions” shifting corporate profits overseas

• adopting a business “cash flow” tax that rewards investment in plant, equipment, and jobs

•  closing the plethora of uneconomic and inefficient corporate tax loopholes.

And then and only then, consider granting the 20 percent corporate tax rate.