What is the Relationship between Corporate Tax Rates and Job Growth?

The central component of the tax reform plan now in the U.S. Congress is a major corporate income tax cut from 35% to 20%. Critics charge that the plan is primarily a tax giveaway to corporations that will enrich corporate elites even more, increase the national deficit, and pass the costs along to the middle class. As Republicans move toward passage of the plan, they argue that the corporate tax cut will make U.S. corporations more competitive, thereby stimulating economic growth and increasing job growth.

Economists have looked at the relationship between corporate tax rates and job growth in a number of different ways. In this short essay I want to summarize three of those approaches. The first of these looks at the history of corporate tax rates in the United States and compares that variability to the variability in job growth to determine if there is a discernible relationship between the two. The second approach looks at the corporate tax rates paid by individual corporations and compares the employment history within those corporations to those tax rates. The third approach I summarize focuses on state corporate tax rates while assessing the job growth rates across the states.

Regarding the first approach to the relationship between corporate tax rates and job growth, the Center for Effective Government reports in a recent study that employment shows no relationship to corporate tax rates. Consider the following graph.

Corporate Tax Rates and Job Growth

As can be seen, corporate tax rates are about the lowest they have been since World War II. Yet there is little, if any, variation in job growth across 60 years of declining corporate tax rates. If declining corporate tax rates were indeed a stimulant to job growth, we would expect to see an increase across time in the rate of job growth. But, we do not.

In the second approach we look at individual corporations, their income tax rate, and their employment history over the past several years. Data for this approach was provided in a recent article by John W. Schoen at the CNBC website. Citing a study by the Institute for Policy Analysis, Schoen points out that corporations, like individuals tax filers, qualify for numerous exemptions and deductions. In the study cited, 92 corporations out of a sample size of 252 were found to be profitable, yet paid 20% or less per year in income tax. In the study, these are listed along with their job history from 2008-2015. A snapshot of this data is shown here.

Graphic showing tax rates for 92 corporations high to low tax rates with interactive data for job growth and ceo pay.

Tax Cut Impact

The graphic above is not interactive. I encourage you to follow this link to access the original graphic in which you can view the details for each of the corporations indicated by the bars. In the meantime we can look at a few cases.

For example, Exxon Mobil is currently taxed at a rate of 13.6%, yet reduced employment from 2008-2015 by 37,735 jobs. Nevertheless, CEO Rex Tillerson, currently the U.S. Secretary of State, was paid $27,393,567 for the year 2016. Amazon.com on the other hand, is taxed at a rate of 10.8% and it added 324,400 jobs. IBM is taxed at a rate of 7.5%, reduced its number of jobs by 12,969 over the eight year period, and maintained a CEO pay of $32,695,699 for the year 2016.

Even without the interactivity, we can see that over half the listing of lightly taxed corporations actually lost jobs between 2008 and 2015. From this perspective the lowering of corporate tax rates to encourage job growth does not appear promising.

The third approach shifts the focus from the federal income tax to state corporate tax rates. As it turns out, only a few states do not tax corporate income, so the question becomes a matter of assessing the state corporate tax rate on job growth. In a study on this topic, Xiaobing Shuai and Christine Chmura found that reductions in the corporate state tax had a positive impact on job growth, but only in the first year after the cut. Subsequent years were not affected. Similar results were obtained by Ljungqvist and Smolyansky, who found that state corporate tax rates had only minimal impact on job creation except in the case of recessions where reductions had a beneficial effect.

The Republican argument for a corporate tax cut is based on the simple idea that if corporations have more money to invest in the U.S. economy, they will. This argument is grounded in the 19th century view that entrepreneurs are driven by the profit motive and will use profits to achieve that end. There is much evidence that contradicts this point of view. In reality, many U.S. corporations shelter billions of dollars in offshore tax havens. These corporations are not cash poor. It is also true that corporations often use profits to buy back their own stock, thereby raising the price of company shares, rather than use those funds for further investment. Policies such as these increase the value of the company to stockholders, but not to employees.

My conclusion is that the Republican proposal to stimulate the creation of jobs through a corporate tax cut is bogus. There is little or no evidence to support that argument.

Sources

Center for Effective Government. “The Corporate Tax Rate Debate: Lower Taxes on Corporate Profits Not Linked to Job Creation” (December, 2013). http://www.foreffectivegov.org/sites/default/files/budget/corp-tax-rate-debate.pdf.

Institute for Policy Studies. “Report: Corporate Tax Cuts Boost CEO Pay, not Jobs” (August 30, 2017). https://www.ips-dc.org/report-corporate-tax-cuts-boost-ceo-pay-not-jobs/

Ljungqvist, Alexander and Michael Smolyansky. “To Cut or Not to Cut? On the Impact of Corporate Taxes on Employment and Income.” National Bureau of Economic Research Working Paper No. 20753 (May 2016). http://www.nber.org/papers/w20753

Schoen, John W. “There’s Little Evidence that Corporate Tax Rates Create Jobs” (August 30, 2017). https://www.cnbc.com/2017/08/30/theres-little-evidence-that-cutting-corporate-taxes-creates-jobs.html

Shuai, Xiaobing and Christine Chmura. “The Effects of State Income Tax Rate Cuts on Job Creation.” School of Professional and Continuing Studies Faculty Publications, 56 (2013).
http://scholarship.richmond.edu/spcs-faculty-publications/56

 

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