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Dec 06 2013

Study: Higher Corporate Taxes = Jobs

One of the most enduring myths of conservatism is that lower taxes on the wealthy and on businesses means more jobs. And it’s certainly true at some point when taxes are extraordinarily high, but that situation does not exist. A new study finds that corporations who paid higher taxes created far more jobs over the last few years than those who paid none.

Paying high tax rates doesn’t stifle job creation at the country’s biggest, most profitable companies and low tax rates seem to be more correlated with job losses, according to a new report from the Center for Effective Government.

The 30 Fortune 500 companies that paid the highest tax rates from 2008 to 2010 created about 200,000 jobs from 2008 to 2012, the researchers found. By contrast, the 30 companies with the lowest actual tax rates in that time frame shed a collective 51,289 jobs.

The report compared tax data compiled by Citizens for Tax Justice with employment data from corporate filings with the Securities and Exchange Commission. The tax data include only companies that turned a profit in each of the three years in question. The 30 high-tax companies each paid at least a 33 percent tax rate over the time frame in question, and only eight of them saw a net decrease in employees. In the low-tax grouping, just two of the 30 profitable companies paid any federal taxes, and a full 15 of them cut their payrolls.

This is correlation, not causation, of course. But it fits very well with the long-range data as well, which shows that lowering taxes on the wealthy and on business does not unleash some economic boom. You need only look at the last few years when the stock market has boomed, the wealth of the rich has increased at an astonishing rate, corporate taxes are at their lowest ever and job growth has still been sluggish. It’s time to bury this myth once and for all.

9 comments

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  1. 1
    doublereed

    I knew there was a reverse effect for high income taxes and jobs, because the wealthy will take a smaller cut and reinvest in their business. So high income taxes leads to job growth because it leads to corporations actually using the money. It’s not perfect, but there’s some reasonable logic there.

    I have no idea what logic could explain this other than sheer corporate greed at the expense of social programs and societal costs.

  2. 2
    Nentuaby

    My SWAG on the reason for this would be they seem from a common cause. Those companies most likely to take extensive tax reduction measures (offshoring assets to banking havens and etc) are also those most likely to ruthlessly cut labor for short term profit gains, because they represent the same mindset.

  3. 3
    Jordan Genso

    What the myth fails to account for is that the businesses are trying to maximize profits. The tax rate they pay on those profits has at most an indirect effect on employment.

    Smart businesses are going to compare the cost of hiring new employees (well, increased capacity as a whole) with the additional revenue expected from the increased capacity. While there are opportunity costs associated with the capital needed to invest in that increased capacity, it’s safe to assume that if the employees are bringing in more money than the company is paying them, the company will hire them.

    The tax rate on the difference (aka profit) doesn’t change the analysis of how to maximize that difference.

    That in no way explains the results of the study though. Maybe the companies that are so focused on paying a smaller tax rate are dedicating too many resources to the accounting department, when they should be focused on improving their operations management instead.

  4. 4
    felidae

    Wages are deductible as an expense for taxation, so high tax rates give companies a choice between giving the money to the government or giving it to employees Capital expenses are also a tax offset, so high business taxes would seem to spur economic growth but not necessarily give high returns to shareholders so it is just a matter of how we craft the incentives to benefit society

  5. 5
    erikjensen

    I argue about this issue often with conservative friends and internet enemies. What’s weird is that they don’t think they need any empirical data to support their assertions. They just make “logical deductions” and use “common sense” to prove that low taxes will cause economic growth (without increasing the deficit), just like in St. Reagan’s day. They don’t need data when they have ideology.

  6. 6
    freehand

    Nentuaby:My SWAG on the reason for this would be they seem from a common cause. Those companies most likely to take extensive tax reduction measures (offshoring assets to banking havens and etc) are also those most likely to ruthlessly cut labor for short term profit gains, because they represent the same mindset.

    Yes. For many (most?) of the financial elite, the enemy are not their competitors but their employees. Lords of old might fight to the death on occasion, but they are still people they can sit down at dinner with on other days. But when the peasants see themselves as your equal, all is lost :(

    They also suffer from an insatiable greed; they are never satisfied.

    And yet, and yet – they are willing to lose money, sometimes even risk it all, simply to hurt the poor.

    Those who are best characterized by these claims will fight the hardest to avoid paying taxes – a redistribution of “their” wealth. Also, they will be most likely to succeed at lobbying the politicians needed for the laws giving them federal and state subsidies. Also, too, I think that the bigger, older, industries will have been most likely taken over by sociopathic snakes in suits.

  7. 7
    Markita Lynda—threadrupt

    Henry Ford’s reasoning was that paying his employees a decent wage enabled them to afford his cars.

  8. 8
    Reginald Selkirk

    Henry Ford wasn’t sociopathic enough to cut it in today’s CEO world.

    We know that high corporate profits do not yield jobs. We have done the experiment – repeatedly. We have record high corporate profits right now. So where are the jobs? This happened before as well, in the late 1980s. Why would a company hire more employees when it won’t help them sell more widgets? And they’re not going to sell more widgets because the 99% can’t afford them.
    Instead, they will spend those extreme profits on extreme compensation for their top administrators, and they will buy out competitors to consolidate market share. Thus the round of merger mania 20 years ago.

  9. 9
    Crip Dyke, Right Reverend Feminist FuckToy of Death & Her Handmaiden

    @Jordan:

    You’re wrong.

    You’re unaware of or forgetting the fact that corporations are trying to maximize **wealth** not profit. Share prices go up while dividends stay flat? Shareholders are very happy. Dividend goes up while share price is flat? Shareholders are a little bit happy.

    Low tax rate encourages paying dividends, which leads the best route to simultaneously increasing share price (ceteris paribus) as reducing fixed costs, high tax rate encourages reinvestment with the best route (ceteris paribus) to increasing dividends as increasing production and sales.

    In the low tax regime, dividends increase by government incentive, and share price is increased in ways that don’t kill the dividend, since that’s what they naturally have to offer. Best way to increase share price, since one doesn’t have the money to increase capacity, is to maintain capacity on fewer costs. Usually this maintenance won’t be sustainable, but if it can be sustained just long enough to transfer to the next CEO, the next CEO can announce dramatic readjustments at the beginning of the term, setting a new baseline of expectations, so it’s really the shareholder – not either CEO – that suffers.

    In the high tax regime, share price is going to increase by government incentive. Dividends are best increased in ways that don’t kill the share price, since that’s what they naturally have to offer. Best way to increase dividends, as costs are going up, is to expand capacity and thus revenue.

    In one case, you’re increasing net revenue while maintaining (temporarily) gross revenue, accomplishing this by taking a bigger share of revenue as profit.

    In the other, you’re increasing net revenue while maintaining share of revenue taken as profit by bringing in more gross revenue.
    ==========
    Obviously this is a simplified model of what’s occurring. There shouldn’t be any illusions that there aren’t multiple factors going on, but under high corporate income tax, short-term wealth is best created by growth, under low, short-term wealth is best created by leading the revenue decline with the cost decline.

    With a long term outlook, income tax is less of a factor, but we have a short-term results culture in the US and Canada. Also, the let’s-pay-no-taxes advocates are likely to overlap with the let’s-pay-no-labor-costs advocates, so there’s confounds to deal with.

    But the simple point, in the short-term culture, stands. By confusing net revenue with wealth, you’re failing to understand what’s going on.

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