Friday, August 9, 2013

Taxing business

Why do rightwingers claim that you need to cut corporation tax to create jobs?

The model they are appealing to, which is entirely incorrect, is that a corporation is like a person. If you have your tax cut, your income is higher, you can spend more on stuff, and that creates jobs. Right?

Yes, this is broadly true for people (we are ignoring that you might save the extra money because savings rates do not necessarily increase when taxes are cut). More money, more demand for stuff. Simples.

But it's not true of corporations. Their revenue is their income, but corporation tax does not tax revenue. And they do not spend the extra money on jobs. Jobs are not something a company makes. They are things that are created when a company seeks to capture surplus demand in the economy. When a company has more revenue, it does not automatically say "hmmm, better spend that money on increasing capacity". It generally says "hmmm, better give more money to our shareholders".

Because in fact companies are not being held back by not having enough money to invest. Across the industrialised world, companies are sitting on cash reserves, buying back stock and increasing dividends. They have all the money they need to increase capacity and "create jobs". What they do not have is demand for what they make or do.

It's not even really worth going into a discussion whether lower corporation tax rates correlate with lower unemployment (but they don't) or whether there's any correspondence with lower tax rates and business investment (but there isn't).

Of course there are marginal cases where increasing a company's profits a little may be the difference between its keeping or cutting a person. But businesses in which this is true are not really viable in any case.

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Connected with that last idea, I wanted to talk briefly about minimum wage, and the notion that if you paid a living wage as minimum wage, businesses would cut jobs. Here's the thing. Yes, it's probably true that some businesses would cut staff to the bare minimum if they had to pay them well, and some businesses would cease trading. But the latter are the businesses we want to cease trading. If they are so marginal that they cannot continue to trade without paying a living wage, they are not socially useful. We don't need them. A mistake people make is to say "without these companies, there'd be no one to 'create jobs'". But no one "creates jobs". The jobs come into being as companies chase a share of demand. If this company doesn't do it, another will. This is in fact what capitalism means. I'm going to write more about this at some point, because I think it's important to understand what economies actually do and how they actually work.

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