Every month, I look forward to the economic outlook article in Tom Henderson’s newsletter, and I like to share it with our readers as well. Tom has a way of using straight talk to break down complex subjects into simple terms. It usually isn’t much more complicated than that, anyway. This month, he breaks down tax reform. If we could get past the rhetoric of the political parties and deal with the facts, we would all be a lot better off because then we could debate truthfully.
Lowering Corporate Taxes: Setting the Record Straight
by Tom Henderson
The tax cut proposal has stirred up the roaches from both parties. However, neither seems to have a grasp or understanding of basic economics. Take lowering the corporate income tax for example. This morning I heard two camps debating the effects of a corporate tax. Sadly, both were promoting their political beliefs rather than economic concepts. One side insisted that if corporate taxes were cut, corporations would neither spend the increased revenues nor hire more workers, but rather buy up stock. The other side tried to convince us that a decrease in corporate tax equals more jobs and higher wages, because the corporations would hire more people as profits increased, and also wages would increase.
What I find amusing is the that the arguments in favor of a corporate tax cut are not necessarily true, even though a corporate tax cut would still be beneficial. At the same time the argument against a corporate tax cut might very well be true, but the effects are still beneficial.
Let’s start with the first argument. It should be noted that when corporations need cash they either can go in debt or issue new stock. The arguments against corporate tax cuts implied that buying back stock or debt is somehow mean, evil and fattening. Re-buying stock is merely a way of paying off debt. Would the statement, “The corporations would not spend the money, but pay off debts” be considered unwise or bad? Of course not!
Another false assumption is asserting corporations will not spend their money if they buy back stock. The question must be asked, “from whom are the corporations purchasing stock?” Individuals, of course! And what are these individuals going to do with the money when their stock is sold? They will do just like everyone, including corporations: 1) They will spend it, which means merchants and creditors will benefit; 2) They will invest it in other businesses, which means new enterprises will have capital to grow; or 3) They will save it, which means there will be capital available for bankers to lend on everything from cars to real estate. All three of these options are instruments of economic growth. The result of more money being freed to the private sector will necessarily lead to an increase in spending, investment or saving. All three of these will lead to economic growth. Economic growth leads to increased employment.
One other effect of corporations buying back stock is to increase the value of those individuals holding on to their stock, as well as increase their dividends. What will the individuals do with their higher increased dividends? The same three options listed above: spend, invest or save.
On the other side of the debate, the assertion that a corporate tax cut would increase wages is not necessarily true. While it is true that if corporate taxes are cut substantially, [then] economic growth will follow, [but] this does not necessarily mean that wages will rise. Why? Because wages are influenced by the laws of supply and demand. As the economy grows, there will be more hiring for those whose skills are needed. Those who have skills that are in high demand and short supply will enjoy an increase in wages. Those who have skills that are less in demand or in abundant supply will not see their wages increase.
For example, if you are a landlord and your property taxes are reduced while demand is high, are you going to lower your rent because your property taxes got lowered? Probably not, because the demand for rentals are high. The point being that an increase in corporate revenues [does] not necessarily equate to [an] increase in across the board wages.
We also need to be reminded that corporations or any business does not pay income taxes, but rather passes them on in the form of higher prices. In other words, a tax on business is actually a tax on consumers in the form of higher prices. Where competition is high, prices will tend to decrease when taxes are lowered.
Conclusion: The reality is that a tax cut on business, which results [in] more money in the hands of the private sector instead of politicians, will result in economic growth. Buying back stock is a form of debt reduction, and therefore is a form of spending. However, a cut in taxes does not necessarily mean an increase in wages. Wages are governed by the laws of supply and demand, not profits.
But Tom, what about the deficits? While tax cuts will grow the economy, without corresponding deep cuts in spending, deficits will continue to grow. Like in the Reagan era, we will witness economic growth, along with increased government revenues. But sadly, there will be increased deficits.
Tom’s Axiom: When wealth redistribution is deemed moral, all that is left is to debate who is going to be plundered and who will receive the plunder.
Tom Henderson /a.k.a. THE NOTE PROFESSOR Copyright © H&P Capital Investments LLC