Sunday, September 18, 2011

Corporate Tax Cuts Don't Create Jobs.

If tax cuts are the most stimulative approach to rebooting the economy, as Republicans claim in rejecting Obama's jobs stimulus plan, then the economy should already be racing, given the trillions of dollars in tax cuts President Bush and Republicans already gave the nation over the past eight years. Right? Wrong!

Unfortunately, Reagan's "supply-side" mythology that "tax cut stimulus works best" is alive and well and still promoted by conservatives today, despite all evidence to the contrary. The outcome of Pres. Bush's 2001 tax cuts was "the weakest employment growth in decades." Republican tax cuts in 2004 didn't fare much better, with resulting job creation well below historical averages. When Bush's White House proposed more tax cuts in 2003, Republicans promised that it would add 5.5 million new jobs between June 2003 and the end of 2004. But "by the end of 2004, there were only 2.6 million more jobs than in June 2003." And, remember President Bush's February 2008 promise that his $168 billion tax cut/rebate economic stimulus plan would stave off economic recession and job losses? Wrong again! All these broken Republican promises stem from a broken understanding of how the world really works.

Corporate Tax Cuts vs. Corp. Job Creation
Source: U.S. Dept. of Commerce: Federal Reserve; U.S. Dept. of Labor; Federal Reserve Bank of St Louis; Wall Street Journal
American corporations are holding more cash on their balance sheets than at any time in nearly a half century, as they continue to save instead of investing or hiring workers, according to a Federal Reserve report released last Friday.

At the same time, Republican presidential candidates and corporate leaders continue to lobby for lower corporate tax rates and huge corporate tax giveaways under the guise that they will lead to higher rates of job creation.

According to the report, non-financial corporations held more than $2 trillion in cash at the end of June, a $88 billion jump since the end of March. Cash holdings made up 7.1 percent of all company assets, the highest level since 1963.

And the report doesn’t even include foreign cash holdings, though 11 companies — including Apple, Microsoft, and Cisco — have foreign cash holdings of at least $10 billion. Those funds, the corporations argue, could be used to spur hiring and job growth domestically through tax breaks like a repatriation tax holiday, as one executive told the Wall Street Journal:

But Jeff Agosta, chief financial officer of Devon Energy Corp., said that whatever companies use the money for—such as investments, dividend payments or stock buybacks—the U.S. would benefit by having the funds come home.

That’s money that’s going to be put into productive use in the United States,” Mr. Agosta said.

Evidence from past repatriation tax holidays, in which corporations can bring foreign cash holdings back to the U.S. at lower tax rates, shows that companies wouldn’t use the funds to spur job growth. As one of the members on President Bush’s Council of Economic Advisers said, the 2004 repatriation holiday “didn’t accomplish the stated goals of bringing jobs and investment to the U.S.” After the holiday ended, corporations cut thousands of jobs and stashed more money overseas in anticipation of a future holiday — a perhaps prescient move, as multiple Republican presidential candidates have endorsed an even bigger tax holiday than the corporations have asked for.

Meanwhile, Republican candidates continue to endorse drastic reductions in the corporate tax rate, even as American corporations pay one of the lowest effective tax rates in the developed world.

Those who favor lower corporate tax rates and bigger giveaways continue to argue more cash on hand will equal more jobs created. The Fed’s latest report, however, is more evidence that equation simply doesn’t work out.

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