Corporate Tax Cuts Don’t Always Lead To More Jobs, New Research Says

WASHINGTON, DC – APRIL 27: The Internal Revenue Service headquarters building appeared to be mostly … [+] empty April 27, 2020 in the Federal Triangle section of Washington, DC. The IRS called about 10,000 volunteer employees back to work Monday at 10 of its mission critical locations to work on taxpayer correspondence, handling tax documents, taking telephone calls and other actions related to the tax filing season. (Photo by Chip Somodevilla/Getty Images)

Getty Images

Who benefits most from cuts in corporate tax rates? Some say it is job seekers, while others see it as a giveaway to the rich.

According to a new paper distributed by the National Bureau of Economic Research, they are both correct and wrong at the same time. The truth is what happens depends directly of the type of business.

“Goods producers increase their capital expenditure and employment in response to a cut in marginal corporate income tax rates or an increase in investment tax credits,” states the paper titled “Who Gains from Corporate Tax Cuts?” written by James Cloyne at the University of California, Davis, Paolo Surico London Business School, and Ezgi Kurt at Bentley University.

In other words, if manufacturers get a better tax deal, you can expect a boost in the number of people employed in that industry.

However, that’s not all companies. Those that don’t produce goods respond differently to a drop in the corporate tax rate.

“Companies in the service sector mostly use any tax windfall to increase dividend payouts,” the report states. The detail provided is telling, as outlined by the authors:

“Following a 1% cut in marginal tax rates, service sector firms increase dividend payouts significantly and by up to 5%,” the report states. “But do not adjust wage bills at all.”

NEW YORK – SEPTEMBER 16: A Wall St. sign next to the New York Stock Exchange (NYSE) September 16, … [+] 2008 in New York City. U.S. stocks continued to drop Tuesday morning for the second consecutive day, following yesterday’s Dow Jones Industrial Average plunge of 4.4% or 504 points, being the worst single day loss since the terrorist attacks of September 2001. Today the Federal Reserve is scheduled to announce the target interest rates for the federal funds. It’s not clear how the central bank will respond to recent turmoil in the world’s financial markets. This comes after news of Merrill Lynch & Co. Inc selling itself to Bank of America Corp, the financial firm Lehman Brothers Holdings Inc. filing for Chapter 11 bankruptcy protection, and insurance giant American International Group Inc. (AIG) attempting to raise capital to stay afloat. (Photo by Spencer Platt/Getty Images)

Getty Images

Put another way, those companies in the service sector tend to pass on the tax cut benefits to their shareholders. Those are often, but not always, people who are already rich.

The real problem with the results is that claims that cuts in business taxes will lead to more jobs don’t hold water in the services sector, which includes banking, advertising, and consulting, plus many other industries. It’s also quite a problem for people devising changes to the tax code because services make up 78% of the U.S. economy. In comparison, manufacturing comprises 11% of the U.S. economy.

If the report’s authors are correct, a blanket cut in corporate tax rates would overwhelmingly benefit investors with higher dividends. Only a small portion of the economy would increase their employee payroll.

Perhaps tax credits should be focused on goods-producing firms rather than on all corporations.

Source: https://www.forbes.com/sites/simonconstable/2023/05/31/corporate-tax-cuts-dont-always-lead-to-more-jobs-new-research-says/