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Lowering the corporate tax will save jobs

Originally posted April 15, 2017.

Let’s talk briefly about boring ol’ economic theory, and then let’s relate it to real life.

Economists often discuss the Laffer curve, which shows the relationship between tax rates and how much government brings in the coffers. The higher the tax rate, the more likely that the object or person being taxed will stop producing or figure out how to move themselves to a different state or country. The lower the tax rate, the more likely they are to produce, but at some point the government gets less revenue.

There, we’re done talking about boring ol’ textbook-style economic theory.

Carrier deal in Indiana

Now let’s talk briefly about the livelihood of about 800 workers at a Carrier plant in Indiana who were able to keep their jobs last November after the company negotiated a deal with Donald Trump and Mike Pence.

Not all jobs were saved, as some talking heads were quick to point out. Other talking heads said that it’s futile to try to save manufacturing jobs because many of them are being automated anyway. It’s certainly true that many manufacturing jobs are being automated, but about 12.2 million people still work in manufacturing. Either way, there’s a disconnect between the talking heads/Washington, D.C. insiders and the world of manufacturing. But we already knew that.

Regardless, about 800 people in Indiana found out that Carrier is not laying them off.

Trump had promised to be tough on businesses or companies trying to leave the U.S., and he was criticized because part of the reason Carrier kept those jobs was because of a $7 million incentive.

 

Now, let’s be clear: the incentive being discussed here is not a corporate tax cut. However, my point is that offering incentives and reduced taxes to companies can at times help actually make more money to the government. Private businesses have to tackle these types of decisions all the time when they consider “elasticity if demand.” Private businesses  realize that cutting prices or negotiating a lower price for a larger company can sometimes yield more money. The key is to strike the right balance: charge as much as you can but be willing to offer a deal or slash prices of doing so can save money.

That’s what happened here when government official said negotiated a better deal with Carrier, and that’s what the U.S. government (and many other countries around the world) does when advocating lower corporate tax rates.

Others don’t like the idea of giving incentives at all, saying there should be a completely level playing field. But that’s not even how the private sector works. Private businesses will often cut deals or offer “bulk deals” to bigger clients. So no, a small business with 2 employees isn’t going to get the same deal as a company with 800 employees, because that small business is not necessarily benefiting the local economy as much.

We understand that there were more factors at play than just the $7 million in incentives offered over several years.

However, offering incentives does affect a company’s decision on where it’s going to operate.

Did the state of Indiana lose anything through the incentive deal? Probably not. The state would have lost much more money if it had not cut a deal.

Let’s do the math.

Savings in employee taxes from Carrier deal

The average employee at Carrier was well paid, making $30.91 per hour.

So if we have 800 employees making $30.91/hr., 40 hours a week, 52 weeks a year, that’s $51,434,240 in payroll.

The federal government will receive quite a bit in one year from those employee in FICA taxes alone. (We’ll get to the state government in a moment.)

Employee portion of Social Security tax: 6.2%

Employee portion of Medicare tax: 1.45%

Employer portion of Social Security tax: 6.2%

Employer portion of Medicare tax: 1.45%

Total percentage in FICA taxes when including both employer and employee portion: 15.3%

15.3% of $51,434,240: $7,869,438.72

Now, let’s assume those 800 Carrier employees are paying an effective tax rate of 7%. Let’s keep it low and assume that all of those Carrier workers have families and a lot of allowances to claim on their W-4 and state tax forms. In other words, let’s be conservative.

7% of $51,434,240: $4,114,739.20

That’s for the federal government alone.

In Indiana the state income tax is 3.3%. I won’t get too far into the weeds trying to figure out the standard deduction, allowances, etc. there.

However, 3.3% of $51,434,240 is $1,697,329.92.

This doesn’t even take into account that many of those employees may never earn as much again if they had been laid off, or that they would actually need to be subsidized for a while with unemployment benefits, food stamps, Medicaid, etc. In other words, not only would Indiana and the federal government lose that revenue, they would have to start paying out more toward those employees.

They would also probably:

  • Spend less overall, lowering government receipts from sales tax to Indiana (at 7%)
  • Travel less overall, lowering receipts from the gas tax (at 33.59 cents per gallon in Indiana and 18.4 cents per gallon for the federal government)
  • Move to smaller houses or perhaps even lose their houses in some cases

Although many of those 800 employees would find other work eventually, that would still leave an additional 800-person hole in the economy for quite a while.

So above we counted one-year tax receipts to state and federal governments alone at over $13.6 million! That doesn’t even count losses in revenues from gas and sales tax.

When you consider that, $7 million in incentives doesn’t sound like much.

This leads us to our conclusion: lower the corporate tax rate. The federal government does not even yield that much revenue from the corporate tax rate, and our country has one of the highest corporate tax rates in the world.

The effective tax rate (the rate companies pay after deductions and loopholes) is about 17.9%, so it would probably be better to cut the effective tax rate to 15%. The Republican-led House had originally proposed a tax rate of 25%, while President Trump had proposed a tax rate of 15%, and so far it seems they’ve compromised at 20%.

There’s a good argument to be made that you can’t be too aggressive in lowering the corporate tax rate, and the reality is that a lower corporate tax rate will increase jobs and increase payroll taxes. This would create a win-win for government, companies, and U.S. workers.

As we see with the numbers above, a $7 million incentive program (over five or more years) could results in savings of over $13.6 million.

So let’s lower the corporate tax rate and save more U.S. jobs.

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