Corporate Taxes and Job Growth: Repatriate like it’s 2004

IN a recent piece for the PPH, Steve Robinson suggests that lowering the corporate tax would be a boon for the American worker with higher wages and greater job opportunities via increased domestic investments:

In contrast, Canada’s combined federal and provincial rate, at 26.3 percent, allows Canada-based businesses to be far more competitive in an increasingly globalized marketplace. If policymakers don’t act swiftly to bring down our punitive rate and simplify the system, we’ll only see more Burger King-style inversions. And research shows that slashing or even eliminating the corporate income tax could pay for itself while increasing domestic investment and wages.

The 2012 paper he links to suggests that eliminating the corporate tax rate in the U.S. would boost unskilled worker wages by 12%, and skilled workers by 13%.

However, there are two problems with the corporate tax rate-job creation nexus suggested in that paper.  First, there is no clear link between corporate tax rates and job growth.  A 2013 study released by the Center for Effective Government found little correlation between the two (from the abstract):

We examined the job creation track record of 60 large, profitable U.S. corporations (from a list of 280 Fortune 500 companies) with the highest and lowest effective tax rates between 2008 and 2010 and found:

• 22 of the 30 corporations that paid the highest tax rates (30 percent or more) on their reported profits created almost 200,000 jobs between 2008 and 2012. Only eight of the 30 firms paying high tax rates reported reducing the number of employees between 2008 and 2012.

• The 30 profitable corporations that paid little or no taxes over three years collectively shed 51,289 jobs; half of these low-tax firms created some jobs, and half shed jobs between 2008
and 2012.

• Lowe’s, the nation’s second-largest home improvement store, paid over 36 percent in taxes on reported profits of $9 billion between 2008 and 2010, and hired an additional 28,820 employees between 2008 and 2012.

• Verizon, the nation’s largest wireless provider, reported $32 billion in U.S. profits between 2008 and 2010, yet received tax refunds totaling $951 million and reduced the number of employees by almost 56,000 between 2008 and 2012.

Moreover, as corporate tax receipts as a share of GDP have declined, and corporate after-tax profits as a share of GDP have increased, net business investment as a share of GDP has declined, questioning the argument that lower tax rates will boost domestic investments:

Lastly, in 2004, the U.S. Congress passed a tax holiday that allowed corporations to shift profits from overseas back to the U.S. without having to pay the statutory U.S. corporate rate.  The theory at the time was, akin to the ideas suggested in the Robinson article, is that it would boost domestic investments and spur job growth.  As noted by the Center for Budget Policies and Priorities (my emphasis):

  • A comprehensive study published by the National Bureau of Economic Research (NBER) found that the repatriation holiday “did not increase domestic investment, employment, or [research and development].”  Multinationals that repatriated higher levels of earnings under the holiday did not increase their domestic investments (or any other approved uses of the funds) to a larger degree than multinationals that repatriated lower levels of earnings. Other studies yielded similar results. One found that “firms enjoying disproportionately larger gains under the act were no more likely to spend repatriated funds on growth-generating activities than other firms.”
  • A study by professors at the Wharton School of Business and the University of Oregon concluded that even though the 2004 law specifically prohibited the use of repatriated earnings for share repurchases, firms used a significant share of repatriated earnings for exactly that purpose.  They found that, “in spite of having plans to invest in approved activities, repatriating firms significantly increase[d] payments to shareholders, and that the amount of this increase is related to the amount of repatriation.” Similarly, the NBER study found that a dollar increase in repatriations “was associated with an increase of almost $1 in payouts to shareholders.” That is, most of the repatriated profits were paid out as windfalls to shareholders.
  • After examining the various studies that have been conducted, the Congressional Research Service reported that the “studies generally conclude that the reduction in the tax rate on repatriated earnings…did not increase domestic investment or employment.”

The actions of corporations following the 2004 tax holiday is not necessarily dispositive of how corporations will respond to a reduction or elimination of the corporate tax rate. For one, a tax holiday is not the same thing as a permanent reduction in the tax rate–different mechanics, different incentives. However, it does highlight one crucial thing; how corporations might respond.  In other words, tax incidence is not always correct, and there are other factors driving corporate decisions to invest domestically that will result in job and wage growth other than tax rates.

For instance, regarding wages, if the corporate tax rate were cut or eliminated, whether wages will rise is predicated on labor’s bargaining power–corporations aren’t likely to just increase wages unless productivity also increase.

Likewise, reducing the corporate tax rate or shifting to a territorial system (whereby a U.S. based company’s profits earned abroad would not be subject to U.S. tax rates) does not guarantee an increase in business investment.  As noted above, as a share of GDP, corporate profits and business investments have not been positively correlated over the past three plus decades.



John Haskell

About John Haskell

John graduated from the University of Southern Maine with a degree in Political Science, and from the University of Maine School of Law. He has worked in both the public and private sectors, and currently, works with a small business services company in the Mid-Coast area.