Fantasy Island: GOP on Corporate Taxation

There is a mandatory mantra to be recited by all proponents of the Republican tax cut plan:  “It will make corporations more competitive. It will raise employee wages.  It will make corporations more competitive. It will raise employee wages. It will make corporations more competitive.  It will raise employee wages. This really requires some unique methodology and some very creative logic. [FC]

First, there’s the obvious proposition that when Republicans speak of “competitiveness” they are addressing a global market for goods and services. Further, being competitive usually means being able to offer goods and services at lower costs to customers and clients.  And, being able to offer goods and services at lower costs means having a grip on factors which increase costs — things like labor.  If there isn’t any obvious connection between “competitiveness” and increasing wages then how can the contentions be contorted to make the mantra lucid?  We probably can’t, at least not until we agree on what we mean by “competitive.”

Whether a nation is competitive hinges instead on its long-run productivity—that is, the value of goods and services produced per unit of human, capital, and natural resources. Only by improving their ability to transform inputs into valuable products and services can companies in a country prosper while supporting rising wages for citizens. Increasing productivity over the long run should be the central goal of economic policy. This requires a business environment that supports continual innovation in products, processes, and management. [HBR]

If we accept the Harvard Business School’s thesis, then the policies we should be adopting to promote competitiveness would be (1) conducive to research and development; (2) that which promotes greater efficiency in the delivery of services and the manufacturing of goods; and (3) that which promotes better management practices.  I don’t see “tax cut” in this list.

Tax policy that encourages research and development, promotes efficiency, and encourages better management practices, might be a start.  However, that doesn’t seem to be what the White House and Congress have in mind.  For example, there’s the tax repatriation scheme — which was tried in 2004, and the result as reported by the Wall Street Journal was:

“The 15 companies that benefited the most from a 2004 tax break for the return of their overseas profits cut more than 20,000 net jobs and decreased the pace of their research spending, according to report from the Democratic staff of the Senate Permanent Subcommittee on Investigations released Monday night.”

“Decreased spending on research” doesn’t fit the formula for increased competitiveness.  Far from it, as in antithetical.  How about promoting long term visions on the part of corporate management?

“Even as managers’ geographic horizons have broadened, their time horizons appear to have shortened. Shareholder activism, stock-based incentives, and declining managerial tenure surely injected new, needed discipline into American business and had some positive effects. However, financial markets and executive compensation practices that reward quick fixes and focus attention on “this quarter’s numbers” can tempt managers to move business activities to whatever location offers the best deal today rather than make the sustained, location-specific investments required to boost long-run productivity. ”  [HBR]

Returning to a consistent theme on this site, short term “financialist” perspectives won’t promote American competitiveness.  However, nothing in the guidance on tax cuts thus far  demonstrates any broad interest in long term productivity.  Indeed, it appears to move right along, in step, with the financialist rhetoric.

So, the Republicans and corporate allies argue that cutting corporate taxes will increase wages.  Before we get lost in the weeds there is a general point to be made about the corporate tax burden and employees:

“Three nonpartisan organizations — the Joint Committee on Taxation, the Congressional Budget Office and Tax Policy Center — all say the majority of the corporate tax burden falls on shareholders, not workers. The Treasury Department, which Mnuchin now heads, reached that same conclusion in 2008 during the George W. Bush administration.”  [FC]

To make a long story a bit shorter — if less of the corporate tax ‘burden’ is hefted by the employees, then the less of a ‘tax break’ the employees will receive if the corporation pays less in taxation.  Some work is required to make the data fit the results desired by the Republicans:

“…the CRS states that while “a number of more recent theoretical studies find that labor can bear the majority of the [corporate] tax burden” those studies “appear to rely critically on particular assumptions that drive the results. When these assumptions are relaxed the burden of the corporate tax is found to fall mostly on capital — in line with the traditional analysis.”   [FC]

Thus, only in the highly theoretical fantasy land of Republican economists will we find support for the notion that lower taxes automatically make our businesses more competitive, and lower corporate taxes will necessarily make businesses pay higher wages.

Unfortunately, none of this will stop the Republican propaganda machine from cranking up the volume and increasing the repetition of their mantra, until it is picked up by Republican members of Congress who will recite it in turn to their constituents.

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