Study Debunks Major Argument In Favor Of Corporate Tax Breaks

A banner reading 'Jobs' hangs on thre facade of the US Chamber of Commerce in Washington,DC on February 22, 2011. New claims
A banner reading 'Jobs' hangs on thre facade of the US Chamber of Commerce in Washington,DC on February 22, 2011. New claims for US unemployment insurance rose for the first time in three weeks but continued to hover near a two-year low, official data released on February 17 showed. The Labor Department said a seasonally adjusted 410,000 initial jobless claims were filed in the week ending February 12, up 6.5 percent from the prior week when claims had fallen to their lowest level since July 2008. AFP PHOTO/Nicholas KAMM (Photo credit should read NICHOLAS KAMM/AFP/Getty Images)

The most popular argument for cutting corporate taxes -- that it helps create jobs -- doesn’t seem to be true, a new paper argues.

According to a working paper by Alexander Ljungqvist and Michael Smolyansky, economists at New York University, corporate tax breaks at the state level don’t help create jobs. There’s one exception: Tax cuts do help create jobs and boost incomes when they are implemented during recessions, the paper says.

If corporate tax cuts don’t do any good, tax hikes must be OK, right? Not really. Ljungqvist and Smolyansky found that the effect of corporate tax rates is what economists call asymmetric: Cutting them doesn’t do any good, but raising them does damage. According to the paper, every “one percentage-point increase in the top marginal corporate income tax rate reduces employment by between 0.3 percent and 0.5 percent.”

To come to this conclusion, the authors studied changes in state tax rates from 1969 to 2013. Over that period, they found 140 tax increases in 45 states and 131 tax cuts in 35 states. They studied overall changes in tax rates, not one-off deals meant to entice a single company to relocate. At best, the estimated $80 billion spent annually on company-specific tax breaks is a wash: Jobs just get moved from one state to another.

The authors are quick to point out that their research is limited to state tax rates and should not be extrapolated to federal corporate tax rates. However, they do note that their conclusions are consistent with research published last year by economists Karel Mertens and Morten Ravn that found that federal tax cuts don’t increase jobs.

Federal tax rates, Ljungqvist and Smolyansky note, rarely change, which makes the impact of altering them difficult to study. Additionally, there’s a huge difference between what the corporate tax rate is and what companies actually pay.

At the very least, this study suggest that reality is far trickier than the boilerplate delivered by business leaders pushing for tax cuts suggests. AT&T CEO Randall Stephenson said earlier this month that corporate tax cuts “drive investment and job creation.” At the state level, the NYU economists say that's not true. At the federal level, cutting corporate taxes may increase investment, but the some evidence has shown that it doesn’t create jobs.

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