Mitchell’s laws: The more budgets are cut and taxes inceased, the weaker an economy becomes. To survive long term, a monetarily non-sovereign government must have a positive balance of payments. Austerity = poverty and leads to civil disorder. Those, who do not understand the differences between Monetary Sovereignty and monetary non-sovereignty, do not understand economics.
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Lower taxes won’t help you save or invest.
If you believe that statement, then you are in perfect agreement with the author of the following article and with Warren Buffett.
Time Magazine: Why Lower Corporate Taxes Won’t Create More Jobs
By Rana Foroohar, February 23, 2012Yesterday, President Obama announced a long-awaited proposal to cut corporate taxes in America, which U.S. businesses complain are much too high by international standards. What’s being missed in all this is that the corporate tax debate and the jobs debate are two separate things. Here’s why.
America has the second highest corporate tax rate in the rich world. But most American businesses don’t pay it. The President is suggesting that the corporate tax rate drop from 35% to 28%. But as my colleague Fareed Zakaria wrote a few months back in Time, few of the biggest U.S. businesses are paying that rate right now; indeed, most are paying much less – 115 of the companies in the S & P 500 paid less than 20% in tax over the last five years. And 39 firms paid less than 10%.
True. If you cut the tax rate from the rate no one is paying to the rate everyone is paying, you haven’t really cut taxes at all. That’s clear, though misleading, as to “no one” and “everyone,” since clearly some businesses must be paying the highest rate (probably small businesses), and would benefit from a lower rate.
But here’s where Ms. Foroohar’s logic gets even screwier:
Fundamentally, lower taxes aren’t the reason that businesses choose to invest, or not, in a certain country. As Warren Buffett told me when I interviewed him late last year, “The idea that American business is at a big disadvantage against the rest of the world because of corporate taxes is baloney in my view. In the 50s and 60s, corporate taxes were 52%, and we were making all kinds of [job] gains.”
True enough. In fact, you can see more and more evidence for the fact that business doesn’t locate in a particular country just because it’s cheaper to do so.
Please, Mr. Buffett. Get real. The 50’s and 60’s did not have the ease of import/export we have now. China, India, South America et al weren’t massive exporters to the U.S., nor was plant relocation as easy and common. We weren’t Monetary Sovereign. We were gearing up for the cold war, the Korean war and the Vietnam war. The euro didn’t exist. In fact, virtually nothing was the same as now. So is this is your best example — a massively different world from fifty years ago?
Consider the recently released Harvard Business School study looking at insourcing and outsourcing decisions among 10,000 alumnae who are running American businesses. The key reason for outsourcing wasn’t labor cost, but a combination of cost, proximity to market, and (most importantly) better worker skill sets abroad. In order for America to create jobs at home, we need to do the heavy lifting to reform education and develop workers who can do the sort of jobs businesses need them to do.
Notice the phrasing, “ . . . a combination of cost, . . . “ Since taxes are part of costs, taxes do affect outsourcing. So let’s not hear any nonsensical conclusion that tax costs are meaningless to business decisions. Tax costs aren’t the only reason to outsource, but they surely are part if the reason.
Additionally, unemployment is not caused only by outsourcing.
Anyway, it gets even screwier:
As Buffett says, nobody ever stopped investing because of high taxes.
Really? Taxes reduce the amount of money a company has available for investing and spending. If a company pays 20%, 10% or even 1% of its profits to the government, that’s 20%, 10% or even 1% it can’t spend to grow its business. Period.
The notion that lower corporate taxes (or better yet, the elimination of corporate taxes) won’t help grow the economy, and thus create more jobs, is so silly on the face of it, one wonders why such mental gymnastics or pure mendacity are brought to bear. What’s the Foroohar/Buffett motive for ignorance?
How much effect President Obama’s plan will have, can be debated, but there can be no debate about the fact that reducing business taxes will help businesses, help the economy and reduce unemployment.
Ms. Foroohar and Mr. Buffet each are awarded a dunce cap, from my unending, sovereign supply, for their statements in direct conflict with common sense and arithmetic.
Rodger Malcolm Mitchell
http://www.rodgermitchell.com
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No nation can tax itself into prosperity, nor grow without money growth. Monetary Sovereignty: Cutting federal deficits to grow the economy is like applying leeches to cure anemia. Two key equations in economics:
Federal Deficits – Net Imports = Net Private Savings
Gross Domestic Product = Federal Spending + Private Investment and Consumption + Net exports
#MONETARY SOVEREIGNTY
#Monetary Sovereignty - Mitchell 
I actually chatted with Warren Mosler about this a few months back. He doesn’t think eliminating the corporate income tax would be a big job creator.
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1. What’s his definition of “big”?
2. What’s your definition of “big”?
3. And what’s your point?
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1. I don’t Warren’s definition of “big”. He said to me, “[C]utting corp taxes doesn’t ‘create jobs’ apart from some kitchen help and gardners for the owners.”
2. My definition of “big” is a policy that will bring down the unemployment rate by at least one full point.
3. My apologies – I should have expounded on my point. With Americans so upset at corporations and the rich, I think we shouldn’t cut corporate taxes at the moment. I think the priority should be to cut taxes on the poor through eliminating FICA, which I know you support.
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I think Warren was just playing the role of obscure-but-deep-and-clever sage, something like Greenspan used to do.
Not doing the right thing, because it might upset the ignorant, may be politic, but it is poor economics, because no one ever knows how the ignorant will react. They are a tricky bunch.
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“Really? Taxes reduce the amount of money a company has available for investing and spending. If a company pays 20%, 10% or even 1% of its profits to the government, that’s 20%, 10% or even 1% it can’t spend to grow its business. Period.”
Except, if it spends the money to grow its business, that money is deducted from profits as a business expense and then not taxed as profits. The level of taxation of profits actively works to raise the comparative risk adjusted value of investing in more growth over taking the profits over the line at which they begin to incur taxation out and using them to feed investment bubbles instead.
(FICA and other such taxes are, on the other hand completely inane, as is the fact that individuals aren’t allowed to manage their own income/expenses the same way similarly and only be subject to taxation on the part of their revenue that represents a net financial profit once their own expenses are deducted)
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KRG,
So taking your point to a possibly unfair extreme, if we were to tax business profits at 100%, we would encourage businesses to spend more on growing their business and on payroll??
Interesting thought, but how does that allow business to save for investment in plant and equipment, which is tax-deducted over time?
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“If a company pays 20%, 10% or even 1% of its profits to the government, that’s 20%, 10% or even 1% it can’t spend to grow its business. Period.”
Aren’t you allowed to offset investment against tax in the US?
Generally a higher corporation tax is linked to more investment, since that is the way to ‘defer’ taxation to a future time – while also at the same time increasing the capital value of the business. By investing you get to spend 100% of the money on increasing the value of your business rather than getting 80% in your pocket as a dividend and giving 20% to the govt.
Lower corporation tax is usually associated with dividend extraction or cash hoarding (if personal taxation of dividends is too high).
It’s the cash hoarding that’s the killer from the economy’s point of view. Much better that the money is spent as investment (higher corporation tax and solid investment tax relief or no tax) or extracted as a dividend (flat tax between corporations and individuals or no tax).
Differential tax rates create perverse incentives.
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Congratulations Neil,
You have just proved that the higher the tax rate, the less money will come out of the economy. Let’s go for 100%, in which case I assume the government will collect $0..
Anyway, it is impossible for a corporation to “hoard” money. Think of what corporations really do with money they supposedly are “hoarding.”
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That’s a bit of an excluded middle logical fallacy argument Rodger. I’m surprised at you.
I’m talking at the sub 50% levels of taxation. But my point was that you get perverse incentives – lowering corporation taxes (but not eliminating them) can leave you with less business investment than otherwise. It’s just there as a simple matter of accounting – it costs the shareholders more out of their own pocket to invest when the corporation tax is lower so they think harder about it. Particular if that reduces the differential with capital taxes so there’s not an easy capital gain any more.
The point though is that it is the tax differentials that cause these effects. If you’re going to lower taxes, you need to do it with all taxes to avoid the perverse effects of differential taxation.
So I’m agreeing with you, but saying don’t forget about the other taxes as well – or it might not turn out as you’d expect.
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Glad I’ve not lost my ability to cause surprise.
Bottom line, all else being equal, the more tax dollars the government collects, the fewer dollars are left in the economy, which is anti-growth and anti-employment.
So, are you saying that at sub 50% corporate tax rates, lowering the rate will mean the government actually collects more taxes?
Rodger Malcolm Mitchell
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“Bottom line, all else being equal, the more tax dollars the government collects, the fewer dollars are left in the economy, which is anti-growth and anti-employment.”
Absolutely.
I’m saying that there are perverse effects in there that you have to be careful of which are caused by differential taxation and essentially people responding to incentives.
Nobody likes paying taxes and they will avoid them if necessary. That has the side effect of increasing business investment – which is spending. So although you have 30% corporation tax, nobody is paying it – but you are getting a lot more spending = a lot more jobs.
Drop that down and that ‘no brainer’ investment suddenly looks a lot less certain when you have to put 20% extra of your own money into it. At that point the tax take might go up as entrepreneurs decide to bank the cash rather than invest in something that is now ‘risky’.
So then you need to put more money into the consumers hands to increase the demand and the profitability of the venture and move it back into the realm of a ‘no brainer’.
So if you cut corporate taxes, you probably need to cut consumer taxes too. Or you may end up accidentally causing spending to drop – which helps nobody.
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A recent national poll by the University of Massachusetts at Lowell found 71 percent of Americans with an unfavorable impression of big business – about the same as those expressing an unfavorable view of Washington.
It’s not as if corporations are hurting. Quite the contrary, American companies are booking higher profits than ever. They’re sitting on $2 trillion of cash they don’t know what to do with.
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Tyler:
I’ll guess the majority also has an unfavorable view of poor people, gays, Catholics, Jews, blacks, immigrants, non-English speakers, sex outside of marriage, the rich, newspapers, advertising, Hollywood, New York and the New York Yankees. That’s what a recession does to people. Makes them have lots of unfavorable views.
Don’t confuse big corporations with “American companies” or “corporations.” I see lots of empty storefronts in my travels.
And aside from the fact that it is impossible to “sit on” cash, if a company doesn’t know what to do with its profits, it’s because they are trying to accumulate for future investing. Otherwise, they’d pay it to shareholders and officers.
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Rodger,
I agree with the majority’s unfavorable view of the New York Yankees – kidding.
I can support lower corporate taxes if it won’t increase inequality.
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According to the latest estimates from the Congressional Budget Office, U.S. corporations paid just a 12.1 percent tax rate in fiscal 2011 on their U.S. profits. FYI: I’m not implying that eliminating corporate taxes would not stimulate the economy. I’m simply pointing out that corporations are barely paying taxes presently.
I see that my previous comment has received two thumbs-down from right-wingers who either love the NY Yankees (unlikely) or don’t like that I’m concerned about inequality (must be Santorum voters).
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havent we been doing this more or less for the last 30 years? they extended the bush tax cuts because it was bad idea to tax the “job creators” they havent been creating a whole lot of jobs(i get so sick of hearing that same old line) i understand that the fed government needs no taxes to spend, i just dont see that by reducing taxes will make a company want to “create” jobs. if my boss got a big tax break for hiring, but had not work, he isnt going to hire someone.
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I mentioned this in an earlier comment: All things being equal, the more tax dollars the government collects, the fewer dollars are left in the economy. That is anti-growth and anti-employment. And that is the bottom line.
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Neil, are you talking about the “Laffer curve,” where cutting rates supposedly increased tax revenue? That belief had not worked, at least a today’s rates.
However, if that’s not what you’re saying, and if you believe (as I do) that cutting rates reduces tax revenue, then reducing tax revenue is stimulative, no matter who is paying the taxes.
Remember, corporations don’t pay taxes. They merely are a legal conduit between their customers and the government.
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If you didn’t know this, corporate tax is paid out of profit not revenue. Since profit is income minus cost, companies can deduct the cost of hiring workers on expenses. This will generate a lower profit and hence a lower paid tax but it will generate higher productivity and a higher future profit. A high tax is an incentive for the companies to reinvest the money and hire more workers, since it’s no point to take out the profit, which will be heavily taxed. A low tax is an incentive to companies to bring down the cost and get the maximum profit, the profits will be retained not reinvested, except for buying other companies which will not produce more jobs.
So I think you who should put on a dunce cap, and not every economist in the world.
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Interesting logic. So, for instance, if we double the corporate tax, businesses will hire even more people and invest more??
Taxes are not what encourage businesses to invest; growth is. The higher the taxes, the less that can be invested in growth. No matter how you try to rationalize it, every dollar of tax taken from a business, is a dollar that business cannot invest in people or equipment.
As federal tax dollars are destroyed upon receipt, every dollar of federal tax taken from a business is a dollar taken out of the economy, thereby an anti-stimulus.
Rodger Malcolm Mitchell
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