On Growth and Taxes

Happy Monday.  From what I see, the tax debate begins in earnest this week, barring someone going horribly off-message.  I give that a 30% chance.

One of the more perplexing points about reducing US Corporate taxes is the belief that lower taxes will lead to job creation.  I am afraid the logic isn’t there.

There are two big pots of money in a corporation – money to run the business and money to return to shareholders.  Money to run the business is before tax, return to shareholders is after tax.  This is generally structured as a dividend.

The logic is, if we reduce the amount of money available after tax, businesses will reinvest.  Or, if we reduce the amount of tax on money returned to shareholders, the business will reinvest.  It is an invalid conclusion.

It is my understanding that corporations are facing another great year of profits.  That means their revenues exceeded costs.  Those costs include labor, or the hiring of workers to produce the goods and services which generate the revenues.

If a corporation already has all the employees it needs and is profitable, how is reducing taxes going to incentivize a corporation to hire more?  The answer is, it won’t.  Companies hire employees to fulfill demand.  Thus, if you want to increase employment, increase demand.  That is a market issue, not a tax issue.  The only employment opportunities coming from this tax bill are for tax lawyers and accountants, for which I am truly thankful.

If more money is returned to me as a shareholder, I MIGHT consider reinvesting.  More likely, I will attempt to diversify my holdings and invest in another opportunity – provided it can generate a reasonable rate of return. But that investment will likely be in the stock market, not in a start-up or small business so new job creation will probably not occur.

The corporate tax system needs to be redesigned, I don’t think anyone with the basic premise.  But the real issue is, do we want to spend $3.0 TRILLION? Once we decide on that, the next issue is how to collect $3.0 TRILLION in taxes without creating whole new cottage industries designed to thwart the collection cycle?

Fundamentally there are two things to consider from my perspective.  Corporations do not pay taxes – consumers pay taxes.  And, redistribution should be between today’s taxpayers, not between generations.  That is, no deficits.

So what to do about this?

First, don’t buy the argument that tax cuts focused on the top 1-5% of income producers will increase jobs.  Demand increases jobs.  Unfortunately, the wealthy can already spend on discretionary items; it is really the middle class and poor echelons that have a desire to spend which actually drives demand.  There is nothing in this tax cut for them.

Second, accept the premise that the corporate tax system needs to be reformed.  It was designed in an age where we were a net producer economy and that is no longer the case.  How we get to true corporate tax reform should probably take a little longer than 3 months though.

Third, question why we have to shift our tax burden to the next two (or more) generations.  Deficit spending is simply asking future generations to pay for our spending habits today.  I personally am not convinced that deficit spending is warranted even in recessions but most economists believe it works so that is probably the only time it may be justified.  I haven’t heard about the US being in a recession at the moment.

Finally, write, call or visit your local congressional delegation.  I know that a lot of these issues are complex and we are only given sound bites to work with, but if it doesn’t feel right, say something.  You don’t need to be a hyper-partisan, you just need an informed opinion.  Remember, this is about our tax structure and how we get where we want to go.  But if you want to spend, be ready to pay the bill.

 

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