Charles Cottle —
The central component of the tax reform plan now in the U.S. Congress is a major corporate income tax cut from 35% to 20%. Critics charge that the plan is primarily a tax giveaway to corporations that will enrich corporate elites even more, increase the national deficit, and pass the costs along to the middle class. As Republicans move toward passage of the plan, they argue that the corporate tax cut will make U.S. corporations more competitive, thereby stimulating economic growth and increasing job growth.
Economists have looked at the relationship between corporate tax rates and job growth in a number of different ways. In this short essay I want to summarize three of those approaches. The first of these looks at the history of corporate tax rates in the United States and compares that variability to the variability in job growth to determine if there is a discernible relationship between the two. The second approach looks at the corporate tax rates paid by individual corporations and compares the employment history within those corporations to those tax rates. The third approach I summarize focuses on state corporate tax rates while assessing the job growth rates across the states.
Regarding the first approach to the relationship between corporate tax rates and job growth, the Center for Effective Government reports in a recent study that employment shows no relationship to corporate tax rates. Consider the following graph.
As can be seen, corporate tax rates are about the lowest they have been since World War II. Yet there is little, if any, variation in job growth across 60 years of declining corporate tax rates. If declining corporate tax rates were indeed a stimulant to job growth, we would expect to see an increase across time in the rate of job growth. But, we do not.
In the second approach we look at individual corporations, their income tax rate, and their employment history over the past several years. Data for this approach was provided in a recent article by John W. Schoen at the CNBC website. Citing a study by the Institute for Policy Analysis, Schoen points out that corporations, like individuals tax filers, qualify for numerous exemptions and deductions. In the study cited, 92 corporations out of a sample size of 252 were found to be profitable, yet paid 20% or less per year in income tax. In the study, these are listed along with their job history from 2008-2015. A snapshot of this data is shown here.
The graphic above is not interactive. I encourage you to follow this link to access the original graphic in which you can view the details for each of the corporations indicated by the bars. In the meantime we can look at a few cases.
For example, Exxon Mobil is currently taxed at a rate of 13.6%, yet reduced employment from 2008-2015 by 37,735 jobs. Nevertheless, CEO Rex Tillerson, currently the U.S. Secretary of State, was paid $27,393,567 for the year 2016. Amazon.com on the other hand, is taxed at a rate of 10.8% and it added 324,400 jobs. IBM is taxed at a rate of 7.5%, reduced its number of jobs by 12,969 over the eight year period, and maintained a CEO pay of $32,695,699 for the year 2016.
Even without the interactivity, we can see that over half the listing of lightly taxed corporations actually lost jobs between 2008 and 2015. From this perspective the lowering of corporate tax rates to encourage job growth does not appear promising.
The third approach shifts the focus from the federal income tax to state corporate tax rates. As it turns out, only a few states do not tax corporate income, so the question becomes a matter of assessing the state corporate tax rate on job growth. In a study on this topic, Xiaobing Shuai and Christine Chmura found that reductions in the corporate state tax had a positive impact on job growth, but only in the first year after the cut. Subsequent years were not affected. Similar results were obtained by Ljungqvist and Smolyansky, who found that state corporate tax rates had only minimal impact on job creation except in the case of recessions where reductions had a beneficial effect.
The Republican argument for a corporate tax cut is based on the simple idea that if corporations have more money to invest in the U.S. economy, they will. This argument is grounded in the 19th century view that entrepreneurs are driven by the profit motive and will use profits to achieve that end. There is much evidence that contradicts this point of view. In reality, many U.S. corporations shelter billions of dollars in offshore tax havens. These corporations are not cash poor. It is also true that corporations often use profits to buy back their own stock, thereby raising the price of company shares, rather than use those funds for further investment. Policies such as these increase the value of the company to stockholders, but not to employees.
My conclusion is that the Republican proposal to stimulate the creation of jobs through a corporate tax cut is bogus. There is little or no evidence to support that argument.
Center for Effective Government. “The Corporate Tax Rate Debate: Lower Taxes on Corporate Profits Not Linked to Job Creation” (December, 2013). http://www.foreffectivegov.org/sites/default/files/budget/corp-tax-rate-debate.pdf.
Institute for Policy Studies. “Report: Corporate Tax Cuts Boost CEO Pay, not Jobs” (August 30, 2017). https://www.ips-dc.org/report-corporate-tax-cuts-boost-ceo-pay-not-jobs/
Ljungqvist, Alexander and Michael Smolyansky. “To Cut or Not to Cut? On the Impact of Corporate Taxes on Employment and Income.” National Bureau of Economic Research Working Paper No. 20753 (May 2016). http://www.nber.org/papers/w20753
Schoen, John W. “There’s Little Evidence that Corporate Tax Rates Create Jobs” (August 30, 2017). https://www.cnbc.com/2017/08/30/theres-little-evidence-that-cutting-corporate-taxes-creates-jobs.html
Shuai, Xiaobing and Christine Chmura. “The Effects of State Income Tax Rate Cuts on Job Creation.” School of Professional and Continuing Studies Faculty Publications, 56 (2013).
2 thoughts on “What is the Relationship between Corporate Tax Rates and Job Growth?”
My friend Charles Uphoff published this related article, “Is the Republication Tax Plan Tax Reform or Tax Fraud?, in The Cap Times in Madison, WI, on Nov. 9, 2017:
Republicans’ release of an outline for the overhaul of our nation’s tax system raises more questions than it answers.
Being billed as the biggest tax cut in history and a boon to middle-income working families, there is little in the details to suggest that any of that is true.
We are being told that cutting the top tax rate for corporations, which are experiencing record profits, and a stock market on steroids, is somehow necessary to stimulate the economy.
But if tax breaks for corporations and the very wealthy actually produce a booming economy, Wisconsin should be near the top of the list in job creation, instead of dwelling near the bottom. Wisconsin’s private-sector job growth ranked 33rd in the country in 2016, according to numbers released by the Bureau of Labor Statistics, and over the past six years Wisconsin’s private-sector labor force grew by about 7.9 percent, trailing the national rate of 13.2 percent from 2011 to 2016 and ranking 34th among all the states.
Statistics from the U.S. Department of Labor, the Bureau of Labor Statistics and the Office of Management and Budget suggest that cutting the top tax rates hinders rather than helps job creation. Between 1980 and 1992, after dramatically cutting the top marginal tax rate to as little as 28 percent, Ronald Reagan and George Bush produced an average of 1,240,000 fewer jobs per year than Jimmy Carter, their Democratic predecessor, who had a top marginal tax rate of 70 percent. Admittedly, there are many factors that are in play in determining job growth, but the claim that tax cuts are a key or even a significant factor in promoting job growth is simply not supported by the record.
More recently, after raising the top marginal tax rate to 36.9 percent, an average of 1,539,000 more jobs were added to the economy per year under President Barack Obama from 2013 to 2016 than were added to the economy under George W. Bush from 2003 to 2008 with a tax rate of 35 percent in effect.
What produces economic growth isn’t trickle-down tax cuts, but increasing wages and investments in things like education, infrastructure and basic research that provide an attractive environment for business growth and development.
Our next-door neighbor, Minnesota, provides an example. When he took office in January 2011, Minnesota Gov. Mark Dayton inherited a $6.2 billion budget deficit and a 7 percent unemployment rate from his Republican predecessor Tim Pawlenty, who managed to add only 6,200 jobs to the state’s economy. Despite raising the top income tax rate to the fourth highest in the nation, between 2011 and 2015 Dayton and Minnesota added 172,000 new jobs to the state’s economy — 165,800 more jobs in Dayton’s first term than Pawlenty added in two terms combined.
While the Great Recession admittedly had an impact during Pawlenty’s tenure, after raising taxes Minnesota is now projecting a budget surplus of between $1.65 and $1.9 billion and is planning additional spending on pre-school programs and education. Over the past decade, while the median household income in Wisconsin has declined by $2,000, Minnesota’s median household income has steadily increased and is now about $8,000 higher than Wisconsin’s.
While President Donald Trump is quick to take credit for what he describes as a booming economy, an average of 50,000 fewer jobs per month have been added during his presidency than were added monthly between 2010 and 2017 under Obama. An average of 139,750 new jobs have been added per month since February of this year when Trump took office. Under Obama, between January 2010 and January 2017 an average of 190,210 jobs were added to the economy per month, according to the Department of Labor’s Bureau of Labor Statistics.
The net effect of Republicans’ proposed “tax reform” will be to further widen the income gap between those at the top and middle- and lower-income families who are struggling to make ends meet. The record suggests that if you want to increase employment and stimulate the economy, raise taxes on corporations and the rich and invest in education and infrastructure.
When asked to comment on proposed cuts to Milwaukee’s public transit system Timothy Sheehy, president of the Metropolitan Milwaukee Chamber of Commerce, reportedly observed: “You can’t cut your way to prosperity.” Perhaps Donald Trump, Paul Ryan and the Republicans should heed his advice.
For those who still think all the answers lie in an unconstrained “free market,” I might ask: “When was the last time banks bailed out the taxpayers?”
Charles Uphoff is a retired, long-time resident of Wisconsin, former coordinator of Wisconsin’s Governors Conference on Children and Families for Republican Gov. Lee Sherman Dreyfus, former member and president of the Fitchburg City Council, former member of the Oregon School Board, and treasurer of The Madison Institute.
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I live in Silicon Valley, which is a very unique place. We can’t necessarily use Silicon Valley to make inferences about the rest of the country. Nevertheless since Silicon Valley has an incredibly huge impact on not just the country but the entire world, it might be useful for everyone to understand the negative effects of job growth in Silicon Valley.
Here are some mind boggling statistics. The median household income in Madison, Wisconsin, is $54K. The median income in Palo Alto, the home of Stanford University and Tesla, is $164K. Even within Silicon Valley there is a wide variation in incomes. In Menlo Park, home of Facebook, I couldn’t find the median income, but 34% of households had income exceeding $200K, as compared to 9% for California overall. In Mountain View, the home of Google, the median household income falls to $120K. In Cupertino, Apple’s home, the median income is $135K. In lowly San Jose, the median income is “only” $77K. An hour south of San Jose (without traffic), in Salinas, the median income is only $50K. The median income in Los Banos, which is 70 minutes from San Jose, the median income is only $44K. Salinas and Los Banos are both small Hispanic cities surrounded by farms. Surprisingly (to me), the median income in Tracy, an hour east of San Francisco, is $75K. A little further out, the median income in Stockton is $66K.
Obviously the wealth in Silicon Valley is off the charts. With such a concentration of wealth comes huge problems. All of this money is pushing the cost of housing through the roof. Whereas the median sale price in Madison is $235K, the median sale price in the 9 counties that make up the Bay Area has topped $800K. Whereas the average rent for two bedrooms in Madison is $1184, the average rent for two bedrooms in Mountain View is $3500.
But, ordinary people such as school teachers and the person behind the checkout counter at the supermarket are not making the same salary as the engineer at Google. Ordinary people can’t live anywhere close to where they work, unless they are married to a top income earner. Consequently, a huge number of people are commuting to Silicon Valley from places like Tracy, Stockton and Los Banos in bumper to bumper traffic. It is becoming a hell on earth, even for the millionaires who commute to their jobs. That’s the irony of the situation, that the millionaires are feeling the desire to escape, not because of high taxes, but rather because it is too crowded. Even multi-millionaires get to a point where they realize that money doesn’t buy happiness. However, having first become multi-millionaires in Silicon Valley, they can then go anywhere they want and leave all of its problems behind them, even though they may be the cause of the problems.
Further complicating matters in California is that the state and local governments are bucking the trends of the rest of the country, as well as in private industry within California itself. Whereas private industry has eliminated pension benefits, California public employees continue to get generous pension benefits. The city of San Jose tried to reduce those benefits for its police and firemen only to see a reduction in job applicants, with a commensurate decrease in public safety. Thus, the city had to cave in by kicking the can down the road.
School teachers and bus drivers are also part of this system. All of them are getting generous raises. If they didn’t, we wouldn’t have any public school teachers or bus drivers, because not all of them are willing to commute from Stockton or Los Banos. And what about nurses? Nurses aren’t public employees, but they belong to powerful unions. Consequently, nurses are getting generous raises too. Without those raises, they couldn’t afford to stay in Silicon Valley and we wouldn’t have any nurses. But, their salaries are contributing to the high cost of health care. Everybody pays.
CalPERS, the state’s public employee pension system, is $153 billion in the red. The marginal tax rate on those multi-millionaires in Silicon Valley is a whopping 12.3%, and the sales tax is a shade under 10%, but these taxes are still not enough to pay for the benefits of public employees. What’s going to happen years from now when the current generation of public employees retire is anybody’s guess, but it’s not going to be pretty.
In conclusion, whenever I hear anybody talk about the need for JOB GROWTH, I just want to SCREAM. I understand that job growth in Wisconsin is a desirable thing. But, in Silicon Valley, wishing for job growth is like wishing you could have cancer. Whenever the Governor of Florida or Texas sneeringly invites companies to move from California to their states while offering generous tax breaks, I pray that those companies will go. Some other companies will always replace the ones who leave. They might not speak English, but they do bring plenty of money and jobs.
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