Thursday, January 5, 2017
Lingering Mythologies: Tax Cuts = More Jobs
As I have blogged on so many occasions, when rich folks and well-capitalized companies get tax cuts, they do not knee-jerk to hire more people. In a gig economy, with contract workers and tons of outsourcing possibilities, even where additional staffing may be required, smart companies tend to approach adding permanent staffing with increasing skepticism, particularly when “uncertainty” defines the approaching business landscape. “Temporary” is better than “permanent” these days. Downsizing under pressure is both painful and expensive.
But when there is much economic uncertainty, companies don’t even reach into those “temporary” or outsourced workplace solutions. They use their newfound tax savings for other purposes that could even have the opposite effect: for example, implementing mergers and acquisitions where jobs cuts are a natural result of such activities.
The most recent disaster from assuming that tax cuts increase hiring (called “supply-side,” “trickle-down” or “incentivize the job-creators” economics) appears in Kansas, where a Republican governor, Sam Brownback, and a Republican legislature installed massive tax cuts in 2012, expecting a significant increase in new jobs, which, in turn, would generate new sources of income tax to make up the difference. Wrong!
Kansas has since faced a rather large budget deficit with some pretty nasty consequences. The June 14, 2014 The Kansas City Star says it best: “Kansas officials badly underestimated the negative effect of the individual income tax cuts that the Legislature passed and Gov. Sam Brownback signed in 2012… Ignore the political spin from Kansas politicians trying to downplay the state’s budget concerns. Focus on the numbers, because they matter more.
“And they reveal the state’s finances are in a huge hole that could get a lot deeper. A state that already is shortchanging its schools, underpaying employees and running disgraceful waiting lists for disabled citizens who need services is likely to experience even more pain…” With a stubborn legislature, Kansas got more pain, as you can see from the picture of Governor Brownback above. He and his GOP legislature seem more like the “Drown-back or Down-back boyz” instead.
As with most such tax cut schemes, the rich do not determine their hiring policies simply based on tax cuts. To add employees, they always need to see how that hiring move would increase their overall business performance and profitability… and that reality is hardly inherent in any basic tax cut analysis.
Enter Donald Trump with all kinds of proposed tax cuts for corporate America and the wealthiest in our land, making the same unjustified statements about how such moves are going to result in the addition of many new, high-paying jobs. Among other proposals, he expects to incentivize corporate American to bring all of their untaxed off-shore profitability back home. Wanna make any bets on how many new, solid jobs will result? CEOs, according to Trump, will create more jobs? So if The Donald gets his way?
“[Corporate] boards and executives may have different ideas… They are likely to use much of the estimated $2 trillion held overseas to acquire businesses in the United States, to buy back their own stock or [in anticipation of interest rate hikes] to pay down debt, say advisers of America’s top corporate executives.
Merger bankers ‘are sharpening their pencils with what types of deals those larger companies can look at,’ said Marc-Anthony Hourihan, co-head of mergers and acquisitions [M. & A.] in the Americas for the Swiss bank UBS. ‘I think M. & A. will be fairly high on the list.’
“American corporations have kept an accumulation of earnings abroad because they would be subject to paying more taxes when they bring it home…. Mr. Trump has said he wants to repatriate such corporate profits with a one-time rate of 10 percent. That is about a third of what is required by the current law, which says companies need to pay up to 35 percent of their earnings to the government, and then get credited for taxes they have already paid overseas, which usually is not much.
“If they were to bring that capital back, those companies could use it to invest in their businesses, which may in turn create jobs. Yet that is only one of several options… If the priority turns out to be deals, that would be good news for investment bankers who generate fees from large advisory assignments. It would be less so for American workers who might get laid off as a result of cost cuts derived from combining two companies.
“Job losses did result the last time Congress initiated a tax holiday, in 2004. The top 15 repatriating companies brought home $150 billion but reduced their work force by 20,931 jobs, according to a 2011 study commissioned by the Senate Permanent Subcommittee on Investigations.” New York Times, December 27th. Another place where facts interfere with mythology and fake news.
So, what else could corporate/wealthy America do with that extra cash – besides blindly spending to hire new workers without a justifiable business plan? They could just declare higher dividends for their shareholders. Or install that “new-fangled” automated equipment, much of it driven by self-adjusting artificial intelligence, to reduce labor costs. More layoffs? The rich get richer? Funny how the Democrats are so smarting from their vicious losses (plural) in November that they have yet to provide a coherent counter to Trump’s “tax cuts that only benefit the rich” plan.
I’m Peter Dekom, and I never ceases to be amazed at how so many Americans believe that implementing clearly failed economic theories under the same assumptions that made them fail many times before will actually work the next time they are used.