When President Donald Trump travels to Springfield, Missouri, on Wednesday to stump for tax reform, he’ll rely on a well-worn argument that giving businesses a tax break will create more jobs.
But while the argument sounds compelling, there’s little evidence to back it up. And a new analysis from the Institute for Policy Studies, a left-leaning Washington, D.C., think tank, throws more cold water on the idea.
Supporters of cutting corporate taxes argue that those savings would free up more capital for investment, allowing companies to expand operations and hire more workers.
That was the argument then-candidate Donald Trump offered last year when he proposed “reducing taxes tremendously” for both small and big businesses.
“That’s going to be a job creator like we haven’t seen since Ronald Reagan,” Trump said in the first presidential debate in September 2016. “It’s going to be a beautiful thing to watch. Companies will come. They will build. They will expand. New companies will start. And I look very, very much forward to doing it.”
But the evidence for that outcome is slim, according to the Institute for Policy Studies analysis.
To test the claim that corporate tax cuts create jobs, the group looked at the payroll changes at 92 publicly held U.S. corporations that posted profits every year from 2008 through 2015 and paid less than 20 percent of these earnings in federal income tax.
That’s less than the top 35 percent tax rate that is the target of supporters of corporate tax cuts. Companies pay less by claiming a wide variety of deductions and exemptions, similar to those available to individual taxpayers.
The researchers relied on companies’ public accounting statements to calculate the amount of taxes paid and on company and news reports to assess changes in payrolls.
What they found was that more than half of these lightly taxed companies actually shed jobs during the period when the overall economy boosted payrolls by 6 percent. Of the 92 companies studied, the median change in payrolls was minus one percent.
Where did the tax savings go? Many of the companies on the list used the free cash to buy back stock, helping to boost the price of their company’s shares. The top 10 job-cutters each spent $45 billion in stock buybacks over the 2008-2015 period, a pace six times that of the S&P 500 corporate average, according to the researchers.
The review also found that CEO pay among the 92 companies rose 18 percent during the period, compared with a 13 percent increase among S&P 500 CEOs.
While the review is not scientific, the conclusion that corporate tax cuts don’t create jobs is backed by other economic research.
In 2014, New York University economists Alexander Ljungqvist and Michael Smolyansky analyzed differences in state corporate tax rates and found that they had little impact on job creation.
“We find little evidence that corporate tax cuts boost economic activity,” they found, “unless implemented during recessions when they lead to significant increases in employment and income.”
Other economic research has found that cuts in individual tax rates can help boost growth and create jobs — as long as they don’t boost federal borrowing to make up the difference.
Congressional Republicans favor deep cuts in both corporate and individual tax rates, but there is less consensus on how to pay for the lost revenues without adding to the national debt. The difficulty in striking that balance has, for decades, thwarted multiple efforts at overhauling the complex U.S. tax code.
The latest effort to cut corporate taxes will rely on generating popular support for the idea, which is one reason proponents insist it would create jobs. But the historical evidence is slim, according to Cornell economist Karel Mertens and University College London economist Morten Ravn.
In 2012, they looked at the impact of changes in U.S. tax policy since World War II, including both personal and corporate tax rates.
While cuts in personal income taxes helped boost employment, investment and consumer spending, the same was not true for cuts in corporate taxes. Lower business taxes did help boost production but didn’t lead to much new hiring, they found.
“In contrast to the personal income tax cut, there is no evidence that a cut in corporate taxes is associated with any significant impact on employment, despite the considerable and significant immediate increase in output,” they wrote.