Monday, March 14, 2011

The Myth of Corporate Tax Cuts Creating Jobs

Mother Jones recently published a graphic piece called, "It's the inequality, Stupid!" laying out just how far the income inequality in the U.S. has gone. It's a pretty damning piece of recent political decisions by both Republicans and Democrats.

In discussing this with a friend of mine, he pointed out one particular figure.

This one: 

(Thanks to - hope they don't mind me borrowing it)

We always hear from the punditocracy that lowering corporate tax rates will spur job creation and increase tax revenue. Yet more and more revenue has been coming from payroll taxes. Taxes paid jointly by employees and their employers. It comes to about 12.4% of the employee's income up to the social security cap of ~$106K. Half is paid by the employer and half is paid by the employee. So employers are on the hook for 6.2% on top of whatever they're paying their employees in this payroll tax. Seems reasonable, right? It is, but just wait. 

In the meantime the corporate income tax has declined. Oh, on paper it the top marginal corporate income tax has been 35% since the Reagan administration, but the things corporations can deduct to lower their corporate tax burden has reached an absurdity.

Case #1. In 2009, GE earned over $10.3 billion in pre-tax income and received $1.1 billion back from the government. So GE's tax rate wasn't 35%. It wasn't even 15% (GE's 2007 effective tax rate). It wasn't even 5.3% (GE's 2008 rate). No. In 2009, on $10.3 billion in earnings, GE paid -10.6% in taxes. They got money back while owing nothing. 

Now I can understand if a company has operating expenses beyond their earnings, they are in the red and should not pay any corporate taxes. However, their tax burden, if that were the case, should be zero. But no. Through myriad corporate tax loopholes, the American taxpayers gave GE $1.1B just for being GE. 

How did it happen? Easy. GE Capital (GE's financial services division) wrote down $6.5B while GE made over $4.3B overseas, which can be deferred from paying corporate income tax indefinitely. Yep. GE never has to pay a cent in corporate taxes on $4.3B in profits. That's an example of a corporate loophole extraordinaire. 

Case #2. The same year, 2009, ExxonMobil made a staggering $45.2B in profits and paid $0 to the U.S. treasury in the form of corporate income tax. How? They legally sheltered billions offshore in wholly owned subsidiaries. So there are accountants sitting up in ExxonMobil figuring out how to screw the U.S. out of billions in tax revenue. 

To wrap up on corporate taxes, a 2008 Government Accountability Office report found that 2/3 of U.S. corporations did not pay taxes from 1998 to 2005. Many did so legally by not earning a profit, but many more used accounting loopholes and offshore subsidiaries to shelter their money. 

So the result of this shift in accounting practices and the never ending inflow of corporate tax loopholes has resulted in what we see in the above graph. An ever falling corporate tax revenue and an ever increasing payroll tax revenue as a percentage of the total tax revenue for the U.S. government. All without appreciable job growth. 

Put simply, lowering corporate taxes (or creating more loopholes) provides a disincentive for businesses to invest in new workers. Not only can they hide most or all of their profits in various ways, but they also save themselves 6.2% of everything any new employee would earn by avoiding the payroll taxes. It is also an incentive to automate services (reduce the number of employees), because you again save that money regardless of whether the automated system increases productivity. 

So if you really want to spur job creation, lower the payroll tax rate on the employer side. Make it cheaper for companies to hire people. Lowering the corporate income tax rate only puts more money into the pockets of the shareholders, but does little to nothing to encourage growth.

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