Day: November 13, 2017

To Cut Or Not To Cut

Congress is about to tackle a new tax reform battle. The assertion hotly debated currently is over the corporate tax rate. It stands at 35%, down from its historic highs in the 1950s of over 50%. It should be noted that during the postwar years of the late 1940s through Eisenhower’s administration, growth of GDP was close to 4% on average. During most of the 2000s, enjoying the lower tax rate, growth has average 1.8%.  That number is deceptive in a few ways, but for our purposes just one is important. GDP—national growth—has been sluggish according to some yet corporate profits have been historically high. Corporations on average are making far higher profits than might be expected from a “sluggish” economy.  Here is a more detailed analysis from the Economic Policy Institute.  Basically, what this suggests is that corporate income tax rates have little or no bearing on either profitability or national growth.  This is a talking point that sounds impressive but is essentially beside any point.

The usual pro-tax cut rhetoric has been deployed once more, basically that cutting corporate tax rates will make money available to corporations for reinvestment and by extension jobs growth.  We have heard this many, many times, and since 1980 it has become a strained, threadbare assertion with no relation to what actually happens.  It makes perfect sense on the surface, but again reality is not so simple.

We have one fundamental problem:  who exactly will buy all the new manufactures who aren’t buying them now?

The Great Depression taught us a few things (which we seem hell-bent on forgetting), one of which was that productivity was not the problem. Accommodation was. Corporations had no trouble making what they were in business to make, productive capacity had reached epic heights, but the availability of all those manufactures had outstripped available credit. With no one able to buy any of it, the corporations drowned themselves in product. Relief programs designed to provide said credit were fought tool-and-nail by conservatives afraid that “give-aways” would sap our moral strength, which resulted in short-sighted policies based on outdated economic and social models which left thirty million Americans unemployed and, worse, largely unemployable. The economy—read, The Market—adjusted quickly to function without them. Without large infusions of money from government and then, later, the adrenalized demands of World War II, those people would have starved.

What will actually happen to all that so-called “extra” money freed up by another tax cut will not go into reinvestment. Some may, but not at the level all the starry-eyed tax reformers want. Most of it will go into dividend payments and bonuses to people who are already doing fine. Once distributed, it will then be absorbed in investment portfolios with global holdings and not spent here, at least not at the level hoped for in order to spur the kind of growth this proposal is touted to spur.  A few people might get raises, but frankly—and I am being a bit of a cynic here—what new jobs have not already been created in an environment of historically high profits will not be created just because those profits are raised even higher. The corporate strategies which seem to work well now will not be changed. Few large corporations are champing at the bit for that money in order to build new factories to make the things they likely will not pay high enough wages to permit purchase in large enough quantity to justify the reinvestment.

What is being discussed a bit more openly is all the money locked away in tax havens.  It is suggested that reducing tax penalties will induce corporations to bring that money back into the United States. But why should it?  If they needed it for growth, they would find a way to use it. They don’t need it.  These are war chests, basically, and reserves to balance economic controls across borders to the benefit of the depositors.

What might be more effective is a bottom up plan that puts that money directly in the pockets of working class and middle class people. Directly. Before we create a permanent dependent class that will never have quite enough and will, in hard times, serve as the seed bed of anarchist sentiment aimed at destruction.  It may be time finally to talk seriously about a guaranteed basic income.

Any rejection of this based on misplaced notions of fairness must take into account the fact that as things are configured now, a certain class enjoys exactly such a thing. What do you think dividends are? One might claim that they are not guaranteed, but they are as reliable as can be.  Any cursory perusal of reputable investment fund performance over the last fifty years shows almost no risk for investors, and with the continued emphasis on tax cuts for corporations, which result in even higher profitability in aggregate, there is certainly a public monetary element involved—where do you think those cuts end up?  And the money itself originates from the communities now being asked to credit these entities with even larger sums, usually at their longterm expense.