Tax cuts do not equal jobs

Renee Loth’s scathing dismissal of efforts by corporate leaders to repatriate overseas profits at greatly reduced tax rates (let’s not open the door to corporate tax-dodging)  caught my attention this morning. She may be overly dismissive of giving a tax break to companies (even at 5.25 percent, many of them will be paying more in taxes than is typical on income — see here for 2008 –which is not to say companies don’t pay taxes — see Business Week and Forbes). But it looks disingenuous for corporate leaders to argue that increased tax revenues will create more jobs. The financial blog Seeking Alpha notes that the premise comes from the thin hope that if people have more money, they’ll buy more things, increasing demand. To wit:

The idea behind tax strategy is not exactly to create or protect jobs, but to increase aggregate demand, i.e., GDP growth, which is what would cause employers to start hiring again. In the case of this tax compromise,[written in December 2010, when the Bush-era tax cuts, and unemployment benefits, were extended] the only aspects of it that seem likely to increase aggregate demand are the reduction in the employee side of the payroll tax and the accelerated depreciation benefit. The biggest slug of it, maintaining the current income tax rates, doesn’t increase aggregate demand at all, it merely avoids decreasing it.

In a global economy, the jobs that are created through GDP growth might not be created here in the U.S., given our slippage in manufacturing. The jobs created here might be restaurant and retail jobs, which are the least productive for the overall economy. Hence Obama’s push to get Americans to make things again. We do still have the world’s second largest manufacturing sector — China only passed the U.S. in 2010. But — and this is anecdotal, so take it for no more than that — entrepreneurs that I meet no longer seem to think they should make things. I’ve talked with two small New England manufacturers in recent weeks. One of them is a fledgling startup that makes its products here, but only because it had a bad experience trying to get its products made in China. The other manufactures all of its output in New Hampshire, but it too is small, and so it doesn’t produce much. Its scientist CEO told me if the company landed a large order, he would immediately seek out a factory in China, rather than try to build a manufacturing line himself.
Loth does raise questions that deserve detailed analysis in the press. Should these overseas profits benefit from the same kinds of offsets that domestically earned profits do?  One of Loth’s commenters argued that companies should have to pay at the same rate regardless of where they do business, just like expatriate individuals do. One thing seems clear: these profits won’t be a magic bullet for our economy, even if they’re taxed in full.

2 thoughts on “Tax cuts do not equal jobs

  1. I had an interesting discussion/argument with a boss/colleague today.

    I’m an “unenrolled” voter – no party affiliation. I mentioned that after 8 years of tax cuts / deregulation (under Bush 2, who was handed a budget surplus), the economy went in the crapper. His POV was that it was Barney Frank’s fault.

    In his particular case I sense an ideology that simply blames everything on the other party.

  2. I’m unenrolled as well. It seems implausible to me that anyone can look at history and not see that big wars drain economies (with the exception of WWII). Even if Bush 2 hadn’t cut taxes, we’d almost certainly be running large deficits. I seem to recall that Barney Frank was adamant about not going into Iraq. Can’t blame him for the deficit, even if you don’t like his role in encouraging subprime lending.

Leave a Reply