Corporate Tax Cuts: Rhetoric and Reality

Right now, most eyes are on Congressional Republicans and their last-ditch effort to destroy the Affordable Care Act, but those eyes will soon turn to the various tax “reform” efforts waiting in the wings.

Bookies are probably taking odds on the likelihood of Congress actually managing to reform the tax code. What constitutes reform, of course, is in the eye (or pocketbook) of the beholder–and that brings us to the arguments about corporate tax rates.

Proponents of a lower tax rate for corporations–Paul Ryan, President Trump and most Congressional Republicans–argue that reducing the rate will spur job creation. Opponents see no evidence for that assertion, and note that few corporations actually pay the current rate now–thanks to various credits and deductions, most of them pay an effective rate that is considerably lower.

Since the argument for reducing corporate taxes rests primarily on the assertion that such a reduction will translate into jobs, the Institute for Policy Studies researched that claim.

To investigate this claim, we set out to analyze the job-creating performance of the 92 publicly held American corporations that reported a U.S. profit every year from 2008 through 2015 and paid less than 20 percent of these earnings in federal corporate income tax.

These 92 corporations offer an ideal test for the proposition that lower tax rates encourage corporations to create jobs. By exploiting loopholes in the existing federal tax code, all these firms have reduced their tax rates to the level that Speaker Ryan and President Trump claim will stimulate job creation. Did these reduced tax rates actually lead to greater employment within the 92 firms? We crunched data available from the Institute on Taxation and Economic Policy to find the answer.

You can probably guess what the researchers found.

Tax breaks did not spur job creation.

  • America’s 92 most consistently profitable tax-dodging firms registered median job growth of negative 1 percent between 2008 and 2016. The job growth rate over those same years among U.S. private sector firms as a whole: 6 percent.
  • More than half of the 92 tax-avoiders, 48 firms in all, eliminated jobs between 2008 and 2016, downsizing by a combined total of 483,000 positions. 

Tax-dodging corporations paid their CEOs more than other big firms.

  • Average CEO pay among the 92 firms rose 18 percent, to $13.4 million in real terms, between 2008 and 2016, compared to a 13 percent increase among S&P 500 CEOs. U.S. private sector worker pay increased by only 4 percent during this period.
  • CEOs at the 48 job-slashing companies within our 92-firm sample pocketed even larger paychecks. In 2016 they grabbed $14.9 million on average, 14 percent more than the $13.1 million for typical S&P 500 CEOs.

Many of the firms that eliminated jobs plowed their savings into stock-buybacks; as the researchers pointed out, such buybacks inflate the value of the stocks and stock options that are a routine part of executive pay packages. The top ten “job-cutters” in the research sample spent $45 billion dollars over the last nine years on stock repurchases– “six times as much as the Standard & Poore 500 corporate average.”

The report identifies some of the worst corporate offenders (AT&T, Exxon-Mobil, GE and several others), all of which have effective tax rates lower than the goal set by Ryan and his crew, and all of which shed employees while raising executive pay.

As the researchers conclude:

Our nation also desperately needs a tax reform debate that dispenses with the fantastical notion that corporate tax cuts will automatically create good jobs for American workers. Policy makers should be focusing instead on ensuring that corporate America pays its fair share of the cost of job-creating public investments in infrastructure and other urgent needs.

A solid first step would be to eliminate loopholes that grant preferential treatment of foreign profits. U.S. corporations should have to pay what they owe on their current offshore holdings and not be allowed to defer these payments indefinitely. By continuing to allow offshore tax sheltering, policy makers are shifting the tax burden onto ordinary Americans and creating a disincentive for job creation in the United States.

As numerous economists and businesspeople have pointed out, jobs are created in response to increased demand for goods and services.

Increases in demand occur when significant numbers of working and middle-class people have disposable income–not when a small group of already obscenely wealthy CEO’s get paid even more.

 

[Originally published at SheilaKennedy.net on September 21, 2017]

Sheila Kennedy is a former high school English teacher, former lawyer, former Republican, former Executive Director of Indiana’s ACLU, former columnist for the Indianapolis Star, and former young person. She is currently an (increasingly cranky) old person, a Professor of Law and Public Policy at Indiana University Purdue University in Indianapolis, and Director of IUPUI’s Center for Civic Literacy. She writes for the Indianapolis Business Journal, PA Times, and the Indiana Word, and blogs at www.sheilakennedy.net. For those who are interested in more detail, links to an abbreviated CV and academic publications can be found on her blog, along with links to her books..

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