Tag Archives: job creation

Corporate Tax Cuts: Rhetoric and Reality

Right now, most eyes are on Congressional Republicans and their last-ditch effort to destroy the Affordable Care Act, but those eyes will soon turn to the various tax “reform” efforts waiting in the wings.

Bookies are probably taking odds on the likelihood of Congress actually managing to reform the tax code. What constitutes reform, of course, is in the eye (or pocketbook) of the beholder–and that brings us to the arguments about corporate tax rates.

Proponents of a lower tax rate for corporations–Paul Ryan, President Trump and most Congressional Republicans–argue that reducing the rate will spur job creation. Opponents see no evidence for that assertion, and note that few corporations actually pay the current rate now–thanks to various credits and deductions, most of them pay an effective rate that is considerably lower.

Since the argument for reducing corporate taxes rests primarily on the assertion that such a reduction will translate into jobs, the Institute for Policy Studies researched that claim.

To investigate this claim, we set out to analyze the job-creating performance of the 92 publicly held American corporations that reported a U.S. profit every year from 2008 through 2015 and paid less than 20 percent of these earnings in federal corporate income tax.

These 92 corporations offer an ideal test for the proposition that lower tax rates encourage corporations to create jobs. By exploiting loopholes in the existing federal tax code, all these firms have reduced their tax rates to the level that Speaker Ryan and President Trump claim will stimulate job creation. Did these reduced tax rates actually lead to greater employment within the 92 firms? We crunched data available from the Institute on Taxation and Economic Policy to find the answer.

You can probably guess what the researchers found.

Tax breaks did not spur job creation.

  • America’s 92 most consistently profitable tax-dodging firms registered median job growth of negative 1 percent between 2008 and 2016. The job growth rate over those same years among U.S. private sector firms as a whole: 6 percent.
  • More than half of the 92 tax-avoiders, 48 firms in all, eliminated jobs between 2008 and 2016, downsizing by a combined total of 483,000 positions. 

Tax-dodging corporations paid their CEOs more than other big firms.

  • Average CEO pay among the 92 firms rose 18 percent, to $13.4 million in real terms, between 2008 and 2016, compared to a 13 percent increase among S&P 500 CEOs. U.S. private sector worker pay increased by only 4 percent during this period.
  • CEOs at the 48 job-slashing companies within our 92-firm sample pocketed even larger paychecks. In 2016 they grabbed $14.9 million on average, 14 percent more than the $13.1 million for typical S&P 500 CEOs.

Many of the firms that eliminated jobs plowed their savings into stock-buybacks; as the researchers pointed out, such buybacks inflate the value of the stocks and stock options that are a routine part of executive pay packages. The top ten “job-cutters” in the research sample spent $45 billion dollars over the last nine years on stock repurchases– “six times as much as the Standard & Poore 500 corporate average.”

The report identifies some of the worst corporate offenders (AT&T, Exxon-Mobil, GE and several others), all of which have effective tax rates lower than the goal set by Ryan and his crew, and all of which shed employees while raising executive pay.

As the researchers conclude:

Our nation also desperately needs a tax reform debate that dispenses with the fantastical notion that corporate tax cuts will automatically create good jobs for American workers. Policy makers should be focusing instead on ensuring that corporate America pays its fair share of the cost of job-creating public investments in infrastructure and other urgent needs.

A solid first step would be to eliminate loopholes that grant preferential treatment of foreign profits. U.S. corporations should have to pay what they owe on their current offshore holdings and not be allowed to defer these payments indefinitely. By continuing to allow offshore tax sheltering, policy makers are shifting the tax burden onto ordinary Americans and creating a disincentive for job creation in the United States.

As numerous economists and businesspeople have pointed out, jobs are created in response to increased demand for goods and services.

Increases in demand occur when significant numbers of working and middle-class people have disposable income–not when a small group of already obscenely wealthy CEO’s get paid even more.

 

The (P)art of the Deal

Economic development efforts often seem like a zero-sum game; Indiana offers training funds or infrastructure improvements or property tax abatements to businesses relocating from, say, Illinois, and Illinois does the same for businesses coming from Indiana.

Even within the state, municipalities try to lure employers to City A from City B by offering tempting “goodies.”

There are lots of problems with this state of affairs. It tends to be unfair to small businesses that have been longtime corporate citizens, and all too often, the relocation would have occurred without the (legal) bribe represented by these incentives. Worst of all, however, is the reluctance of the state to require or enforce appropriate “clawback” provisions.

When state or city government offers incentives to businesses, it is in return for that business undertaking to create a certain number of jobs. The idea is that the government will recoup its up-front investment in the form of additional taxes paid by a growing workforce. The agreement, or contract, obligating the unit of government to provide the incentive should include provisions protecting the government in case of default; in other words, if the business fails to create the promised jobs, or moves its operations elsewhere, it should be required to repay the amounts advanced.

Fair enough. You do what you say you will do, or you pay us back. The Pence administration, however, pursues a narrow version of the clawback.

An IndyStar analysis found that the Indiana Economic Development Corporation — which Pence leads — has approved $24 million in incentives to 10 companies that sent work to foreign countries. Of those incentives, nearly $8.7 million has been paid out so far.

During that same period, those companies terminated or announced layoffs of more than 3,800 Hoosier workers while shifting production to other countries, where labor tends to be far less expensive.

The state has clawed back or put a hold on some or all of the incentives in four of those cases, returning $746,000 in taxpayer subsidies. But in the other six cases, the companies faced no consequences.

The primary reason: The job creation and retention requirements in the state’s incentive agreements are usually narrowly tailored to a single facility, leaving workers at other sites owned by the same company vulnerable to offshoring.

During the last legislative session, House Democrats  authored language that would have required corporations that move facilities out of Indiana to re-pay any property tax incentives they had received, and also would have prevented those companies from receiving other state tax breaks. The proposal–which was an amendment to another bill–ultimately went nowhere.

Meanwhile, as the Star reported, the state’s much-touted job growth figures pale in comparison to the jobs lost to offshoring.

Those records show that the same 10 companies or their related subsidiaries have laid off or plan to layoff more than 3,820 workers in Indiana because work has been shifted to other countries since 2013.

Those losses are more than three times larger than the number of jobs that would have been created under the state’s incentive agreements, even if they had all come to fruition.

Here’s the thing: companies have the right to move their operations. But that shouldn’t mean they have the right to move and keep the tax dollars that Hoosiers forked over in the expectation that they would honor their commitments, stay in the state, and create jobs.

A deal is a deal–and the state should play hardball, not wiffle-ball.

 

 

Job Creation Delusions

Given the state of the economy, it’s understandable that candidates and incumbents alike would focus on job creation. It’s also understandable that the mayor and governor would make a big deal out of promises to locate new factories in Indianapolis.

But it’s beginning to look as if the “vetting” process could use some vetting of its own.

Yesterday, Mitch Daniels and Greg Ballard–along with representatives from Develop Indy–held a media event at a field in northwest Indianapolis to announce that a California businessman would be building a factory to manufacture huge TV screens mounted on trucks. (Reading the initial story, my husband opined that the business seemed goofy to him, but I reminded him that, at our ages, we’re tech dinosaurs, so what did we know?)

Turns out it isn’t just the business plan that’s goofy. First the IBJ ran a story noting that the owner of the enterprise lacked experience. Then this morning’s Star reported on the bizarre behavior of both the “entrepreneur” and a project manager from Develop Indy. The story also noted that Litebox, the company being applauded for bringing jobs to Indianapolis, had yet to purchase the land on which the factory was supposed to be built.

Economic development is never a sure thing. Well-conceived, well-financed projects may not make it. But surely, before they commit public resources to a project, the city and state could do a minimal amount of due diligence.

The media have raised questions before about the veracity of jobs claims made by both the state and city, and this embarrassing episode would seem to confirm their skepticism.

It’s hard not to to speculate over the timing of this announcement–apparently, it was rushed in order to help Ballard before the election. It blew up in his face, and didn’t add any luster to the Daniels administration, either. That’s what happens when people act out of desperation.

It’s the Economy, Stupid!

Most of us remember James Carville’s admonition—the one that became the singular focus of the successful Clinton campaign—“it’s the economy, stupid!”

That laser-like focus on economic well-being was generally seen as a smart campaign tactic, which it was. But it was also smart policy.

Which brings us to the current campaign for Mayor of Indianapolis.

Partisans have argued about the candidates’ respective visions—or lack thereof—and there have been the usual competing claims about public safety, neighborhood revitalization, tax increases and the consequences of selling off city assets. But addressing those issues—in fact, addressing virtually every single issue that voters care about—depends upon the economic health of the city.

And that means good jobs.

It was Henry Ford who first recognized the importance of paying factory workers decent wages—not out of the goodness of his heart, or because he had some sort of humanitarian impulse (he wasn’t noted for either), but because he wanted them to be able to buy his cars. His logic—his recognition that success in business requires people with the means to buy your goods—seems to have escaped many of today’s officeholders.

The same logic applies to cities. You can’t create bike lanes, improve schools, hire police or pick up garbage without money. In Indiana, thanks to state-imposed tax caps that are starving units of local government, cities desperately need workers able to pay the taxes and fees we do impose. We also need to minimize the burden large numbers of jobless citizens place on municipal finances.

Which candidate is most likely to create the jobs we need?  Indianapolis voters have a choice between a former Deputy Mayor for Economic Development and an incumbent with a jobs record we can examine.

So how has Ballard done?

According to the Bureau of Labor Statistics, 62,000 fewer people were working in Indianapolis this year than were working here in 2007. As the IBJ reported in late August, “while Indianapolis was hardly alone in losing jobs during the recession….no other major Midwestern city has seen such a sharp decline.”  Among Midwestern cities, Indianapolis lagged Pittsburgh, Nashville, Columbus, Milwaukee, Louisville, St. Louis, Cincinnati, Minneapolis, Kansas City and Chicago.

Those still working also lost ground; wages for private workers have declined 8.6 percent during the past four years.

This is stunningly bad performance.

To be fair, one reason for our pathetic showing is Governor Daniels, who believes that government should slash public employment to balance budgets—despite the loss of tax revenue and the added stress on social service budgets that accompany such measures. Most economists believe such actions trigger a self-reinforcing downward spiral.  If Ballard recognized the consequences of Daniels’ policy for Indianapolis, he certainly didn’t protest.

Indianapolis needs leaders who understand the connections between government actions and private-sector reactions–leaders who understand that employers don’t relocate their businesses just by comparing tax rates. (Don’t believe that? Look again at the list of cities outpacing us.) Businesses don’t move to places with bad public schools, troubling crime rates and other elements signaling a poor quality of life; they move to—or stay in—cities offering amenities like well-tended parks, efficient government agencies and convenient public transportation.

Given Indiana’s tax caps and other fiscal constraints, the only way the next mayor will be able to do anything other than continue selling off public assets (and our children’s futures) is to create jobs and grow the tax base.

We aren’t stupid, and it really is the economy. Indianapolis—which used to lead—is lagging well behind our peer cities. Kennedy’s right—we can do better.

 

 

Learning from Experience

I know I have harped on the dismaying extent to which our policymakers legislate on the basis of ideology rather than evidence, but I want  to revisit that theme again today.

Several people have commented on my recent post/IBJ column about the drug war–and the enormous sums we continue to spend (in a time of austerity, no less) on a policy that everyone sentient knows has not only failed miserably, but in many ways has been counterproductive.

As a civil libertarian, I would have great qualms about the drug war even if it HAD been effective. But let me suggest another policy area where ideology has trumped experience.

It always seemed to me that the argument against confiscatory tax rates having a negative effect on job creation made sense. (Leave aside the question of what constitutes a “confiscatory” rate for now.) If I am a wealthy person, and I know that even a successful investment in a new factory or other job-creating enterprise will yield a minimal after-tax return, why should I take that risk? And even if lower tax rates leave me with more dollars in my pocket that I DON’T invest, filling my order for that fur coat and yacht creates jobs, too.

Unfortunately, experience has not supported that eminently logical proposition. As a number of economists have documented, job creation has actually IMPROVED after tax increases. Again, actual performance depends on how much of an increase, on what, and how steep the rate is following the increase. But increases in the general income tax rates have demonstrably NOT harmed job creation-quite the contrary.

There are many reasons why we have experienced this puzzling departure from theory. The most likely is that–contrary to the belief that people are  “rational actors,” humans are more complicated, and what constitutes a “reward” or “incentive” will vary widely from individual to individual. I can attest that many academics who could make much more money in the private sector work as hard for the recognition of their peers as many private-sector folks work for financial rewards. (As I so often tell my students, “it’s more complicated than that theory might suggest.”)

The real question, however, is not why a particular, perfectly reasonable, theory didn’t hold up. The real question is, why do so many people stubbornly cling to the theory and ignore the evidence provided by actual experience?