One of the greatest fallacies of our era is the notion that American corporations will create new American jobs if they are subsidized through tax cuts. This has been shown to be false. Instead, the US government should tell corporations, “You can get a tax cut, but only after you have created the jobs.” American corporations should be forced to earn the privilege of tax cuts if they can show they’ve increased their hiring of American workers.
The current election cycle presents an opportunity to examine this issue anew. Donald Trump has proposed cutting corporate the corporate tax rate to 15 percent and allowing repatriation of foreign earnings at a special 10 percent rate. He assumes American companies will create new American jobs with this windfall. It’s unlikely, if history is any guide. Foreign earnings by 304 companies now stand at $2.1 trillion. The money sits overseas, untaxed. Trump wants to give these businesses more than half a trillion in tax cuts in exchange for basically nothing.
High-paying, long-term jobs with good benefits are in short supply, but American businesses have nothing but incentives to dump workers. American businesses earn more when they close plants and move jobs offshore with no repercussions to shareholders or management. Layoffs goose share prices and line CEO pockets. Corporate tax subsidies just enrich a few already rich people in an economically destructive process.
The last time a Trump-like foreign tax reduction was enacted, the Tax Holiday of 2004, the top 20 companies returned $150,000,000,000 to their bottom lines while cutting 21,000 American jobs.[1] If his proposal were enacted today, the impact would be worse. The top 20 foreign earning corporations (GE, Exxon Mobile, Apple, etc.) have $1.049 trillion stashed abroad. With Trump’s 10 percent tax, they would reap a $262 billion tax savings. It would be nothing more than a huge, accountability-free giveaway used for stock buybacks and executive bonuses. Little benefit would accrue to American society.
For balance, the Clinton job stimulation proposal suffers from a similar flaw. She recommends subsidies for investment in new industries like clean energy. But, what guarantee do Americans have that these subsidized corporations will create high-paying jobs in the US? A new clean energy company might find its most profitable option is to outsource its supply chain to Asia, netting very few new American jobs.
Congress should reject proposals like Trump’s. Instead of a giveaway based on a promise of future hiring, corporate taxes should be reduced based on past hiring history. Congress could pass a law that enables corporations to earn a tax cut worth two times the increase in their annual payrolls. In this case, if the top 20 foreign earners invested 5 percent of their offshore income in American jobs, or $52 billion, that could result in the hiring of 1.3 million Americans at salaries of $40,000 a year each. In return, they would earn a $104 billion tax cut.
The more Americans that corporations hire, the less taxes they will owe. American companies could be motivated by a performance-based incentive, just like their employees. Of course, because American jobs are only created when there is a profitable reason to hire Americans, some imagination will be required to fill these positions. American businesses will have to venture into higher value creation sectors, where highly-paid Americans make America globally competitive. But, if they can’t find a reason to hire more Americans, then they shouldn’t get the tax break. They should pay their full taxes like everyone else.
Once incentives are aligned, many possible vehicles for job growth emerge. There could be special private equity funds that earn the privilege of lower capital gains rates based on job creation. Bonds that demonstrate job creation could pay tax-free interest. Preferences in government contracting could reward companies that pay more Americans higher salaries and benefits and so on. State and local governments can enact similar measures.
Though the payroll taxes generated by the new hiring will not match the revenue lost through the corporate tax cut, the overall fiscal impact should be neutral. New Fortune 500 hires create downstream spending, derivative hiring and local tax revenues. It’s not a simple fix, but it is possible. The status quo doesn’t work. It’s time to try making the subsidies contingent on corporate hiring performance.
[1] http://www.cbpp.org/research/repatriation-tax-holiday-would-lose-revenue-and-is-a-proven-policy-failure
