THE CONSERVATIVE AGENDA
Now that Obama has submitted a stimulus package I am struck by the fact that the Republican in have returned to their standard of trying to stimulate business through tax breaks and tax credits. They use the excuse that businesses will hire more people if government would only give businesses tax credits for every additional person they hire. The problem is that this is pure bull shit. The demand for labor is derived from the demand for the goods and services businesses sell. When businesses get stimulus credits they are only applying for money based upon people they would have hired anyway. They believe that they are not doing anything wrong because they feel that the money is going for hiring people and since they're hiring, why shouldn't they get the stimulus money. The forms that are completed merely move numbers around to prove that the stimulus got them to do the hiring. It is a shell game on a massive scale.
To understand what I'm talking about you only need to look at the CFO.com article of Sept. 24, 2005 entitled "Tax Breaks Don't Boost Investment." This article looked at the effect of tax credits on business investment and found that the companies with tax breaks cut their investments by 22%. The article concluded that investment was based more on the demand for a company's goods than on the cost of making the investment. In other words, the demand for any production input is based upon the demand for the goods and service the inputs produce not on an artificially reduced price of the input.
I do not like this either, as far as balance.
Rachel does not like it.
But remember, I tell myself, there are more boosts coming down the pike this year.
January 23, 2009 9:15 PM | Reply | Permalink
The CFO.com study only focused on the years 2001 thru 2003. You could also look at what happened after the corporate tax cuts took effect in 2003. Corporate tax receipts, as a % of GDP, increased from about 1% to 3% from 2003 to 2007, the highest level of corporate tax receipts in 20 years. Any set of numbers can prove whatever hypothesis somebody has in mind.
Businesses certainly respond to changes in the corporate tax rate. Try doubling the corporate tax rate - do you think that tax receipts would double? Of course not, businesses would cut back on their investments and re-think their budgets.
The problem is that right now companies are deleveraging just like consumers are deleveraging. And I'm not talking about just banks, this is happening to all non-financial firms as well. And today, just like in 2001-2003, it is very hard for companies to get financing/credit to make capital expenditures.
They may use the money from the tax cuts to shore up losses, just like consumers will use the rebate checks to pay down credit card bills rather than buy a new car.
But that doesn't mean we shouldn't have business tax cuts as part of the stimulus - and I'm not sure I understand what solution is being proposed by the poster (to give 100% of the stimulus to consumers??). I think the stimulus should be balanced among consumers and corporations.
I believe in supply & demand. You need to focus on both sides of the equation. You can't just give money to consumers and expect to boost demand. You need to give entrepreneurs incentives to start new businesses and for existing businesses to start new ventures. And you also can't honestly think that businesses don't respond to changes in their tax rates.
January 24, 2009 2:42 PM | Reply | Permalink
Businesses take tax rates into account in their calculations. However, in my experience, if the only reason you are making your hurdle rate is because of tax breaks you are not going to make the investment. There needs to be a sound economic reason to invest in a new project. In the absence of underlying demand investments don't make sense.
Your example of increased corporate tax collections has nothing to do with the corporate tax cuts but rather with consumer tax cuts that increased demand. You're falling for the post hoc ergo promter hoc fallacy.
January 27, 2009 7:42 PM | Reply | Permalink