Corporate Tax Cuts Don't Stimulate Job Growth

Original Link: http://www.usnews.com/opinion/blogs/susan-milligan/2011/06/20/corporate-tax-cuts-dont-stimulate-job-growth

By Susan Milligan

Prevailing conservative wisdom dictates that businesses need tax cuts—and investors need capital gains tax cuts—to get the economy moving. But two very well-executed articles on wages and taxes published recently suggest that targeting tax cuts at business executives may do little to improve the dismal unemployment picture.

The Washington Post offers a startling analysis of income disparity, noting that the gap between the very rich and the rest of us has grown dramatically in the past few decades, reaching current levels that have not been seen since the Great Depression. In 2008, the Post reports, the top one-tenth of one percent of earners took in more than a tenth of the personal income in the United States. But the moneyed class is not dominated by professional athletes or big-name artistic performers or even hedge fund managers, the Post found. Instead, it is due to a big increase in executive compensation, even as real wages for some of their workers have dropped:

The top 0.1 percent of earners make about $1.7 million or more, including capital gains. Of those, 41 percent were executives, managers and supervisors at non-financial companies, according to the analysis, with nearly half of them deriving most of their income from their ownership in privately-held firms. An additional 18 percent were managers at financial firms or financial professionals at any sort of firm. In all, nearly 60 percent fell into one of those two categories.

The New York Times has a fascinating story that serves as an unwitting companion piece to the Post story. Corporate executives, the paper reports, are clamoring for a tax holiday to encourage them to bring their offshore profits back to the United States. And the money in question is big, the Times notes: Apple has $12 billion in offshore cash, while Google has $17 billion, and Microsoft, $29 billion. The companies with money sitting offshore argue that if the federal government were to offer them a huge tax break—say, a one-year drop from 35 percent to 5.25 percent—the businesses would bring the money home and operate as a private-sector economic stimulus. [See a slide show of the top 10 cities to find a job.]
However, the Times notes:

(T)hat’s not how it worked last time. Congress and the Bush administration offered companies a similar tax incentive, in 2005, in hopes of spurring domestic hiring and investment, and 800 took advantage. Though the tax break lured them into bringing $312 billion back to the United States, 92 percent of that money was returned to shareholders in the form of dividends and stock buybacks, according to a study by the nonpartisan National Bureau of Economic Research.

Who needs a tax cut, then? The U.S. economy is very much consumer-driven; companies aren’t hiring, many business owners say, because people aren’t buying. The past behavior of corporations that have received huge tax cuts has not necessarily been to use the money to hire more people; the Bush-era tax cuts have been in place for a decade, and the unemployment rate is still 9.1 percent. And executive compensation has grown. Executives may feel entitled to earn more and more if their companies are doing well and expanding. But without customers, those companies will go bust.