Of Taxes, Economics, and Intellectual Honesty
There’s an op-ed — article is too kind a word for it — up on the White House website entitled “Of Taxes, Math, and Intellectual Honesty” which seeks to defend the GOP’s corporate tax cut in academic terms by citing Adam Smith and a blog post from a University of Chicago Economics Professor.
Without getting into why the White House is linking to some guy’s blog to defend its only major legislative success in the last year, the thrust of this article is classic trickle-down economics. It argues that cutting the corporate tax rate will incentivize investment in the United States resulting in more jobs, higher wages, and a wealthier middle class.
But there’s a big piece missing from that puzzle and it can be highlighted by a rather simple question: if lower corporate tax rates drive investment, why isn’t every corporate headquarters and factory in the world in Somalia? Somalia has a zero-percent corporate tax rate. They should be rolling in it.
But they’re not. Somalia borders on the brink of anarchy. Its government is unstable; laws are capriciously enforced; infrastructure is in decay; education is in shambles. In every sense that matters, Somalia has failed as a state and, as a consequence, few want to do business there.
In contrast, Germany has a nearly 30% corporate tax rate. Other European economic powers have rates well into the mid 30s and still manage to attract enough corporate investment to keep their populations gainfully employed.
The Corporate Tax Rate is plainly not the only factor that drives investment
It's not even the largest one. Corporate investment requires contract and property rights enforcement, infrastructure, an educated workforce, and synergy with other companies and industries doing the similar things. That’s why America’s banking giants are headquartered in deep-blue New York with its high tax rates. That’s why America’s technology giants are headquartered in left-coast California with its 8% corporate tax rate rather than in Wyoming where the rate is 0%.
So when politicians say they’re going to cut the corporate tax rate to attract corporate investment, what they mean is that they’re going to ask corporations to pay less to maintain the infrastructure they use and they’re going to ask you and me to pay more.
Because if you’re looking to build a new factory you still need schools for the workers’ kids. You still need roads to move materials in and finished products out. You still need police to keep the crime rates down. You still need airports, a military, and all of the millions of moving parts that make a post-industrial society function, nearly all of which are either supplied or overseen by the government.
And if corporations aren’t paying for those, the taxpayers are.
It is, in an odd sense, a perverted form of socialism. Services that corporations need will be funded one way or the other, either from corporate taxes or by spreading those costs out over the entire population.
Case-in-point: the Foxconn factory in Wisconsin. The Wisconsin state government put together more than $4,000,000,000 in financial carrots to get Foxconn to build a flat-screen production plant in Racine County, Wisconsin. That includes billions in taxes Foxconn won’t have to pay but also hundreds of millions in new road improvements, new electrical substations, environmental exemptions, and a laundry list of other services and projects that Foxconn needs to operate in the area.
In exchange for that $4 billion in enticements, Foxconn has committed to hiring just 3,000 workers with an expected wage of about $53,000 per year. Even if Foxconn hires all of the 13,000 of the workers they suggested (but did not promise) when selling Wisconsin on the deal, that still means that the people of Wisconsin are essentially paying the entire Foxconn workforce out of state coffers for six years. Yes, Foxconn workers will pay taxes in Wisconsin but unless the plant stays open, running at full capacity, for a quarter-century Wisconsin voters won’t break even on the deal.
Wisconsin does not “own the means of production” here — they’re just paying for it. Foxconn will own the factory, pocket the profits, decide when to bring in out-of-state workers, and determine when to move elsewhere should new opportunities arise.
To bring this back to the Trump Tax Plan, the new tax framework will lower the corporate tax rate by tacking an additional $1.5 trillion (or more) onto the US deficit. That deficit spending accounts for countless services, projects, and other commitments which attract companies to the United States which are no longep paid for by tax dollars. The US government will still be doing those things but those companies will no longer be paying for them.
We will. You and me. Taxpayers.
If — and that’s a big if — the tax cut actually incentivizes corporate investment in the United States, that investment comes at a punishing long-term cost which is coming out of my paycheck and yours.
The White House op-ed closes with this pithy rejoinder:
The bottom line is that the size of the pie isn’t fixed, as economists have known for centuries, and reducing corporate taxes doesn’t change household incomes by transferring money from the government to the household.
And they’re right. Reducing corporate taxes doesn’t change household incomes by transferring money from the government to the household, it changes household incomes by transferring money from the household to the corporation.
Admittedly, that corporation is made up of people who pay taxes, but given that the average CEO in this country is paid 300-times what the average worker makes, that really means it transfers wealth from the working class to the upper 0.1%.
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