On Monday, Paul Krugman announced that Secretary Clinton was very well informed about economic matters. So let’s test this claim by looking at one of her policy proposals.
In one of her ads, she says that as President she will bring back jobs for the middle class (we’ll ignore the fact that increasing the wages for existing middle class jobs to something above $50,000 per year would be more useful) by providing a tax credit to companies that create manufacturing jobs in the US. Her website says only that she will provide tax incentives to companies to invest in the US, which is not exactly the same thing, but it’s all the same concept. So let’s look at this example of Clintonian Third Way Compassionate Conservatism.
The first thing one notices about this “plan” is that like most of Secretary Clinton’s “plans”, this one is made up of rhetorical flourishes but lacks any substantive explanation as to who gets the tax credit, how much of a tax credit and based on what (amount of investment, number of jobs created, wages to be paid in these jobs and measured over what period?) or how this undefined tax credit would create jobs. These observations point out some of the major problems that Secretary Clinton has as a developer of domestic public policy generally: a lack of critical thinking skills; a lack of knowledge about business, tax policy and tax effects; and a lack of knowledge about economics and the state of the US economy.
Secretary Clinton has another public policy blind spot that causes problems with her plans: she thinks corporations are people, whereas a moment’s thought reveals to everyone (except the majority of Justices in the Hobby Lobby case) that corporations are legal fictions that act only through people. In terms of investment and overall hiring decisions, that person is the CEO. Secretary Clinton doesn’t want to see that CEO’s are problem because it would hurt her relations with some rich people which relations are very important to her. Let’s ignore that for the moment and analyze the policy proposal.
Problem 1: The US tax code is filled with incentives, mostly in the form of tax credits and deductions (accelerated or otherwise), that encourage CEO’s to invest their company’s money in the business of the company in the US. Does Secretary Clinton think these tax incentives aren’t working? We don’t know; or if so, why. Again, we don’t know. Does she even know they are out there? We don’t know that either. Which leads to the question: How are the Clinton tax credits/incentives different than the existing ones in either amount or in the behavior which is being rewarded? Who knows?
Problem 2: The existing tax incentives to invest in businesses are part of the income inequality problem, so why would Secretary Clinton want to make that worse? Because of the way CEO’s are paid and the fact that small businesses are managed so as not to have to pay taxes, the point of the existing tax incentives is to create better income statements for public companies so the CEO’s can pay themselves more money. Which raises the question of why Secretary Clinton thinks bribing CEO’s to invest in their own businesses is the best way to benefit the middle class or to create jobs? Obviously, it would be more economically efficient to just give money to the middle class or to start a government jobs program doing, among other things, better regulating American businesses, ending job discrimination against women, people over 50 and minorities, etc. In reality, Third Way Secretary Clinton is proposing to adopt a form of Reaganomics: pay the already rich CEO’s to cause their companies to invest in themselves and hope that some of the money trickles down to the workers. Why she thinks this would work to any noticeable degree is a mystery which she and Dr. Krugman will have to explain.
Problem 3: Many publicly held companies don’t pay taxes and, as noted above, small businesses are managed to not make income so they don’t pay taxes. In this tax environment, tax incentives for CEO’s to cause their companies to invest more money in their companies obviously don’t work. So any impact of the Clinton plan will be very limited, at best.
Problem 4: The best way for CEO’s to get their Boards of Directors to raise their compensation is for the company to have a noticeable increase in its income from last year as shown in the annual income statements. As an accounting matter, any expenditure of cash by a public company to support the business of the company is an expense, which is to say a reduction in income. Thus, any expenditure of money by a company to “invest in the business in the US” will reduce the company’s income in the year of expenditure, which given the short term thinking in corporations is the only time frame that matters.
Tax credits are never at a rate of 100%, unless Secretary Clinton is proposing such a rate and has just forgotten to tell us about it. Thus, the undescribed Clinton tax credits/incentives will only lessen the adverse impact of an investment by a company in its own business on its income statement and thus on the compensation of Secretary Clinton’s CEO friends and supporters. Since the proposed tax credits/incentives must reduce compensation of the CEO’s who must order the investment in their company, it is hard to see why the CEO’s would give such an order even if they only lose less money because of the tax credits/incentives than they would have otherwise.
Problem 5: The Fortune 1,000 companies are already sitting on large amounts of cash which their CEO’s refuse to invest in their businesses for the reason explained about: investments in the business reduce the company’s income and, hence, CEO compensation. So even offering to directly give companies money to “invest” in jobs in the US will not encourage CEO’s to hire workers they don’t need to do jobs that don’t generate enough revenue to create enough income to increase the income of the company on the income statement and thus the compensation of the CEO. It’s all just common sense. Tax credits/incentives will in no way encourage CEO’s to order the investments which Secretary Clinton wants them to.
None of the above analysis is a secret or even complicated. It just requires a knowledge of tax policy, human nature, business operations, and economics. So perhaps Dr. Krugman can explain to us how the economically very well informed Secretary Clinton has proposed such a pointless plan and is telling the voters that this plan will create jobs, when it clearly won’t. Or perhaps he can explain to us how he missed understanding the non-effects of the plan.