The Republicans often claim that we have to cut the corporate tax rate in order to create jobs and get the economy recovering.
Well, let’s test this theory out. Let’s put a conservative party in charge of a country that is similar to the US, and have them cut their corporate tax rate from 21% to 16.5%. If the economy doesn’t get better within a year, we’ll cut the corporate tax rate again to 15%. Their economy should be going gangbusters, right?
I have bad news for you. Canada has done just that — the conservative government cut corporate taxes first in January 2011, and then cut them again in January 2012. It is now two-thirds of a year later, and their economy is still plodding along in an anemic recovery, like ours. In fact, their unemployment rate is going down slower than ours is.
In the last three years, the Canadian economy has failed to produce new jobs faster than the US, even though their corporate taxes are now among the lowest of the G7 countries.
Want another experiment? How about one right here in the US. Let’s take a large corporation and reduce their taxes so much that according to the New York Times, instead of them paying corporate income taxes to the US government, the IRS writes them a check for $3.2 billion. So their taxes are negative. Well, we did that for General Electric, and what happened? They are laying off workers.
Note that GE claims that they did pay US taxes, but they will not release the actual numbers and they have often admitted that they are using very aggressive tax strategies to reduce their corporate tax burden. So it is safe to assume that their federal tax rate is very low, and yet they are still shedding jobs.
How many times will we have to learn that trickle down economics does not work?
8 Comments
We seriously gave trickle down economics a try during the Reagan administration. And it did not work. In the end it was the Federal Reserve cutting interest rates that caused the economy leap in to action. Low interest rates are what we have now. So it is government spending/stimulus that is required to get our economy moving again. Even so, with the European a bit of a mess, this will probably be a long road to recovery.
It should, because when the tax breaks save money, the same money gets invested in business. Also, the product prices gets lowered, leaving people more money to spend and boost the economy.
@Rahul that would work in a perfect world, but in our world, companies are greedy. Look at what happened with the last bailout: companies didn’t use that money to hire, they used it to pay bonuses. And, the cost of products has nothing to do with how much money the company has on hand, or how high their tax obligation is. It has to do with what people are willing to pay, and what their competition is doing.
A company would be stupid to invest money in this economy to grow their production, and would be hard-pressed to expand to new locations or pools of customers. With demand so low due to high unemployment and a fall in average household income, demand is very low right now. Why would a company take money they get in the form of tax savings and use it to grow when they are already meeting the needs of their clients? That’s bad business. So, you can’t very well make the argument that cutting the tax on business would create jobs. A good business person would never create jobs when they don’t need to. If you want more evidence of this, look at how many companies are sitting on billions (yes, billions) of dollars that they aren’t using for anything. Why would they do that? Because until the economy picks up and demand starts increasing for products and services, there is no reason to spend money on new jobs.
If we want to see a decrease in unemployment, you have to give the consumer more freedom and buying power. Cut the middle class tax rate, even for just one fiscal year, and it will probably have a much greater impact than cutting the corporate tax rate long term. But Republicans and conservative economists always start with the premise that supply-side economics work, which in itself is erroneous. They ignore the mountains of evidence to the contrary, and continue to press for austerity by the government and trickle-up wealth for the private sector. Why not just cut out the middle-man (or rather, top man) of trickle-down economics and just give that money straight to the consumer?
@Rahul – you are making some invalid assumptions – the same ones that fool people into thinking trickle down could work. Any real economist will tell you trickle down is a fantasy, but let’s just work with your comments.
1) tax breaks save money, saved money gets invested in business.
Not so. Tax breaks don’t save money – they allow for higher profits. The correct question is, what does a company do with excess profits? IF those profits result from the company having more demand that supply (as is the case with a hot new product like the iPad) the excess profits get invested to grow capacity. But if the excess profits are purely from low taxes, the money gets stashed in the bank (against rainy days, for acquisitions, or for future expansion) OR it gets pocketed by the executives and the major investors – all of whom are in the wealthy 1%.
Conversely, to a point HIGHER taxes produce more investment in the business. If the company has to choose between giving the money to Uncle Sam (zero benefit) or investing the money (future positive benefit) they will invest. But with lowered taxes, the choice is between investing the money (future positive benefit) or putting the money in their own pocket (immediate, personal highly positive benefit) guess which way they choose?
2) low taxes lower prices to consumers, higher taxes raise prices to consumers.
This is conservative propaganda, not economics – and it almost NEVER HAPPENS. Taxes are assessed on PROFITS – what is left after prices (revenue) meet costs. All companies try to make high profits. Prices are set as high as possible ALL THE TIME. They are only lowered to try and increase volume, because 10% of $1B is more than 50% of $100M. But if taxes increase (or decrease) IT DOESN’T CHANGE THE MARKET PRICE POINT OR THE COSTS.
You see, taxes are NOT COSTS. They are assessed AFTER costs. And if companies could charge more for their products, THEY WOULD regardless of taxes because they will always try to make the most money.
So, stop listening to conservative propaganda and take an Economics course – because the math clearly shows the “lower taxes are automatically better” is simply not true.
Apparently, according to Faux News, mathematics has a liberal bias.
I think an example might be in order. Let’s say you are trying to sell your home. Of course, you will try to get as high a price as possible. If your taxes get lowered, would you think “gosh, my costs just got lowered, so I’m going to sell my home for less money”? Of course not.
In fact, lowering taxes can increase prices. In particular, the mortgage deduction on housing is one of the main things that drove up the price of real estate.
Keynes vs Rand? No contest. Keynes wins. Time to work on demand. As Alan Greenspan (Mr. I love Ayn) said testifying before Congress – “I was wrong.”
If you had a billion dollars in 2008, would you invest in manufacturing, where the prospects for gain looked dim, or would you stick it into oil, where prices at the pump are fairly inelastic? Take one half of the money from the richest and give to the poorest, that money will find it’s way up the chain again.
Actually, it was demand, not the price of gas that is inelastic. perhaps I should read what I write before I post it.
But Canada’s unemployment rate did go down. From Feb 2011 to Feb 2012 it went from 7.8% to 7.6% and is now at 7.4%. Unemployment decreased during Putin’s corporate tax cut, same in Sweden in 1994 and 2009, and when Clinton cut the capital gain’s tax.