As if natural disasters and Category 5 hurricanes were not enough, President Donald Trump is proposing a Category 5 reduction in corporate taxes, from 35 percent to 15 percent. Meanwhile, Republican Speaker of the House Paul Ryan is suggesting a Category 4 cut, down to the mid-20th percentile. Combined with other proposed tax cuts, these plans would generate a gigantic hole in the federal budget, with potential revenue losses of up to $7.8 trillion over the next 10 years.
How will we fill this gap? According to Trump and Ryan, with increased economic growth. Lower taxes will spur corporations to hire more workers and expand. Economists who reside on planet Earth, and who know how to use a calculator, disagree.
According to the nonpartisan, nonprofit Institute on Taxation and Economic Policy, large companies already paying less than 20 percent in corporate tax have been shedding jobs at a rate of 1 percent per year, while the private sector as a whole has had a 6 percent increase in job growth. The facts run counter to the Trump/Ryan theory.
The News & Review is a private sector corporation, and we have been paying corporate tax for the last 37 years, as we took a bankrupt newspaper with revenues of $200,000 and grew it into three newspapers with revenues around $6 million.
So, I’m in a good position to evaluate how the change in the corporate tax rate might impact the hiring decisions of companies. Based upon my experience, not much.
The decision to hire more employees, to add services or to expand to another city is based on whether you believe the move will make money. If your company has a good year, and you have made a profit, then you have to decide what to do with that money. Should you put it in the bank, or should you invest it in growth? The key question is, how much profit do you think you can make on that investment? For example, if you believe that hiring additional staff will add to your profits, then you will do that regardless of whether the corporate tax rate is 35 percent or 15 percent. You pay corporate taxes only after you make a profit. Ironically, a higher corporate tax often will encourage a business-owner to expand, because some of the startup expense will decrease profits, meaning there is less corporate tax to pay.
Of course, corporate taxes do reduce the profitability of a business. But I believe they have little impact on business expansion and hiring decisions. And someone has to pay taxes to keep the government running. Corporations would like to move the tax burden onto middle-class people. They say this will help expand the economy. It won’t.
But the rich and their political friends keep repeating this falsehood. It did not work with George W. Bush’s tax cuts and it will not work with Trump’s. But corporations and the wealthy are making substantial political donations to candidates who are willing to support moving the tax burden to the middle class and eliminating services to the poor. It’s class warfare.
