We have heard the same line, over and over, from Republicans, from Koch funded "think"-tanks, from the Chambers of Commerce. You all know it. "Tax cuts create jobs." "Tax cuts trickle down." "Tax cuts for job creators!"
And, it is flat out wrong. Obviously, blindingly, demonstrably wrong.
I had a liberal friend tell me, "I hate to say it, but I think we need to cut corporate tax rates so corporations don't ship so many jobs oversees. You can't deny that lower taxes would create more jobs."
Yes, yes I can deny this. I deny it with the core of my being. The American people have been fed this misinformation for so long that even some liberals now believe tax cuts might save jobs.
The following diary is my attempt to demonstrate why they are all wrong:
Lets start with history. Lets compare the 2000s to the 1990s.
1990s: The tax rates were increased in 1990 and 1993. Capital gains rates were cut slightly in 1996. (http://www.taxpolicycenter.org/...) And, 21 million new jobs were created in the 90s. That is about a 20% increase in the number of jobs available in the United States. (http://www.bls.gov/...)
2000s: The infamous Bush tax cuts passed in 2001, and even before the Bush recession began, job growth lagged behind GDP growth. After the Bush recession, we had a net job growth of... 0%. And, thanks to population growth, no new jobs means record high unemployment. (http://www.bls.gov)
But, correlation isn't necessarily causation. For example: The number of US sports franchises have grown since the 1900s, and the earth is far hotter now than in the 1900s, but sports franchises do not cause global warming.
For correlation to imply causation, there must be a logical link between cause and effect, and here it is...
Lower tax rates Increase labor costs. Wait, what? That can't be right, can it? Low taxes for corporations increase labor costs? But what about all the conservatives saying business need tax cuts so they can hire more workers?
Yes, lower corporate income tax rates increase labor costs. You see, business get tax deductions for all their expenses, including worker salaries. (Internal Revenue Code Section 162.) So, the cost of a worker to a corporation is their salary times 100% minus the corporate tax rate (plus payroll taxes, which is a whole different diary, but I would not be opposed to a temporary payroll tax holiday.) If the cost of a worker abroad is lower than the cost of a worker in the US, then the corporation will hire people in other countries rather than here.
Let me illustrate this with a very simplified example. This example is not intended to reflect real American wages or the way corporations use subsidiaries to hide profits, it is just to demonstrate the principle of effective cost of labor in regards to tax rates.
A corporation, let's call them Paliburton, sells shoddy electrical equipment in the US. The cost of a worker in the United States is $10 per hour. The cost of a worker in Thailand is $5 per hour. The corporate tax rate in the United states is 35%, the corporate tax rate in Thailand is 0%, and there are no payroll taxes. Paliburton has shipping expenses approximately equal to $1.00 per worker hour if their products are made in Thailand and shipped to where they are sold in the US.
The cost of hiring a US worker is $6.50 per hour, because Paliburton pays $10 per hour, and then receives a tax deduction for their expenses, which at a 35% rate, gives them a $3.50 per hour benefit for hiring a US. worker.
The cost of hiring a worker in Thailand is $6.00 per hour, because of the $5.00 per hour salary and $1.00 per worker-hour shipping expense. Since Thailand has 0% tax rate, they get no tax benefit for workers there.
Now lets pretend the House Republicans plan for taxes pass, and the corporate tax rate is lowered to 25%. The cost of labor in Thailand is unchanged at $6.00 per hour. The cost of labor in the United states rises from $6.50 per hour to 7.50 per hour, because deductions for business expenses are worth less with a lower tax rate.
Now lets pretend that Democrats let the Bush tax cuts expire, causing corporate tax rates to return to the 39.6%, where they used to be. And Democrats tack on a windfall tax of 5% to any corporation making more than $1 billion dollars a year. Paliburton makes more than $1 billion per year. Paliburton's effective tax rate is now 44.6%
The effective cost of labor in Thailand is unchanged at $6.00 per hour. The effective cost of labor in the United States drops from $6.50 per hour to $5.54 per hour.
Wait, if the effective cost of labor in the United States is lower than it is abroad, wouldn't companies maximize profits by hiring in the US? Wouldn't that decrease unemployment? Wouldn't the tax increase on corporations and the increased revenue from US workers (who now actually have jobs) help balance the budget?
Yes, yes, and yes.
Then, why do Republicans and business leaders alike insist that lower tax rates for corporations are a good thing for jobs?
Well, two things. First, high tax rates do discourage risk taking. If you have a 50/50 chance to lose a billion dollars while creating a new company that makes 1.5 billion dollars, that's great, right? Well, not if you pay 40% in taxes on your profits, because you are then betting $1 billion to win $900 million. However, you could argue that excessive risk taking on Wall Street was a primary cause of the financial meltdown.
Second, Republicans and business leaders do not care about jobs. They say they care about job creation because that is what the general population cares about. But what Republicans and business leaders really care about is making more money. Higher corporate tax rates reduce the cost of labor, but they also decrease the after tax profits of a business. Corporations might start hiring American workers again, but that $1 billion dollars a year of after tax profit that Paliburton makes might just fall to $900 million, if the corporate tax rate were to go up.
So, how do we fix the deficit while creating jobs? How do we treat workers to a decent wage while preventing jobs from being shipped overseas?
I would raise the corporate tax rate.
