We’ve heard this narrative a million times: The notion that lowering tax rates will spur job-creating investment.
There’s no empirical evidence to support it, and in fact good reason to believe that the exact opposite is true.
How have we gotten to the state where the false narrative is so rarely challenged? Right wing pundits toss it out on TV as if it were an underlying truth of the universe, and the reply is always “Yes but [some other thing]...” rather than calling bullshit on it.
The reason higher tax rates can spur investment, business expansion, and job creation is that income taxes are reckoned on net income or profit AFTER expenses and depreciation. When a business makes a capital or expense investment, it realizes a tax savings. The greater the tax rate, the greater the tax savings and thus the greater the incentive to invest.
It’s probably easiest to illustrate by the example of Steve’s Bike Shop, which has recently been in the news: nymag.com/...
In parallel with his basketball career, Steph Curry has been operating Steve’s Bike shop, and it’s been a good run. The long expansion of jobs from 2010 through 2016 has been great for business, and although the job creation rate is down in 2017, Steph is confident that more demand is coming.
Steph is considering investing $100,000 to add three more work stations to the shop’s repair facility during 2018. Based on his current tax rate of $39.6% on pass-through income, if he spends that $100,000 in 2018, he’ll get $39,600 in tax savings. [A note to nitpickers: Even though this is a capital investment, Steve’s Bike Shop can expense the entire amount in the year incurred due accelerated depreciation rules].
This is a good deal — for a net cost of $60,400, the Bike Shop can make $100,000 in improvements which will yield income for years to come. Steph decides he should go for it!
Not only is it good business, but the upgrade will result in a nice chunk of construction work for a neighboring company, and will create three new permanent jobs once the improvements are done.
But wait. Steph gets wind of an expected reduction on the pass-through tax rate to 25%. In one sense, that’s good news for him as the owner of the shop, but it also makes the investment less attractive because spending $100,000 now only yields $25,000 in tax savings.
Reconsidering, Steph decides to distribute the $100,000 profit to himself instead of investing it, taking advantage of the lowered tax rate. Being a sensible person, Steph realizes that almost all of his assets are in the USA, so he diversifies by using the money to buy ADRs (i.e. stock) in a couple of Chinese companies.
What just happened?
Instead of this small business re-investing in jobs and the community, the money has gone out of the community and actually out of the country, invested in an overseas company that’s working hard on their plan to clean our clocks back over here.
This example was based on pass-through income tax for a small business, but the exact same principle applies to larger business and the corporate tax rate, proposed to go down from 35% to 20% — a huge reduction in the incentive to invest. The principle operates more slowly but is also applicable to non-expensible capital investments.
Let’s be clear: The entire and only reason for lowered tax rates is to help plutocrats accumulate a bigger share of the pie, and in fact to help them suck money out of local businesses so they can then place that money where they want, often overseas.
It’s tough to refute zombie lies like this notion of tax breaks leading to jobs. A cadre of bullshitters has repeated this one so many times over the course of years that they believe it themselves, or don’t question it (especially when paid to spread the meme). The refutation has a little complexity — math, eeeeeek! When anyone does dig in to the subject, it’s possible to gain a local victory for reality in one setting for one moment, but we all know the same bullshit is going to be said by the next person on the next channel the next minute.
But then, maybe one victory for reality in one setting could matter, if multiplied by all of us.
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References:
Disclosure: To my knowledge, Steph Curry does not really operate a bike shop, at least he never mentioned it any time we were hanging out. The example is a reference to the “Steve’s Bike Shop” line in the GOP tax giveaway plan explainer.
“Rich People’s Taxes Have Little to Do with Job Creation” www.americanprogress.org/… (Source of title graph)
“Cutting corporate tax rates will not create jobs or boost incomes for the vast majority of American families” www.epi.org/… (source of second graph above)
... economic theory and data do not support the idea that cutting these [tax] rates would encourage further investment in the U.S. or benefit Americans in general; we find that such cuts would primarily benefit a small number of high-income capital owners while increasing the regressivity of the tax system overall.
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James R. Wells is the author of The Great Symmetry, a science fiction adventure celebrating the freedom of ideas. The story is set 300 years in the future, but that future world appears to be arriving about 299 years sooner than expected.