Nick Shaxson ■ How to kickstart sluggish growth: tax corporations more

Corporate tax-cutting, in action

Corporate tax-cutting, in action

The Financial Times columnist John Plender he has written an exellent article that contains a number of points – every single one of which, bar one, has previously been argued by TJN. We won’t summarise them all – please read the full article, if you have a subscription, but it’s almost uncanny how much he agrees with our position (whether he’s read our stuff, we don’t know.)

He begins by noting that the US corporate income tax take has fallen from 5.9 percent of GDP in the early 1950s, when a mini-ideology known as Public Choice Theory became all the rage, arguing that

“a predatory state was using its tax-collecting power to maximise revenue in the interests of self-serving politicians and bureaucrats.”

The corporate tax take has sunk since then to just 1.6 percent of GDP today – and this, we note, has come in an era of soaring corporate profits, particularly since the 1970s. Overall tax revenues have generally not fallen, but this masks the fact that under the pressure of tax wars, the tax charge has fallen away from mobile capital and the wealthy, and has been shifted onto poorer people.

Plender then observes that:

“Smaller companies, which innovate and create jobs, carry an unfair share of the tax burden as they are less global.”

This is pretty much identical to what we’ve said repeatedly in the past, for example:

“Multinationals can use these tax subsidies to out-compete smaller, locally-based competitors, which do not exploit the loopholes in the international tax system and are typically the true innovators and job creators. Multinationals kill them in markets using a weapon (tax) that has nothing to do with genuine business productivity or true innovation.”

This is a matter of crucial importance. Tax avoidance by multinationals is increasing concentration in markets, leading to oligopoly and monopoly, with the result that prices rise for consumers and wealth accrues to the owners of corporations, which means, overwhelmingly, wealthy people.

But it is his next argument that is more interesting, because so few commentators have noticed it, amid widespread scaremongering that corporate taxes somehow make an economy ‘uncompetitive’. Plender:

“A little noted feature of such tax avoidance is that it coincides with and contributes to increased cash hoarding by companies.”

This is a feature we have been arguing about for some time. Corporations are hoarding cash, and this is an important component of economic imbalances that we know have been holding back growth. As our Taxing Corporations webpage notes:

“Worldwide, corporations are currently sitting on trillions of dollars’ worth of idle, uninvested cash piles. Cutting taxes on them is like pushing on a string: it won’t increase investment or growth.”

And we’ve expanded:

“That money is sitting there, not being invested. There isn’t the demand for investment to respond to: consumers aren’t feeling particularly wealthy.

But there is a good way to increase demand. Tax those cash piles, and spend the proceeds.

It’s an unambiguous win-win for everyone except for the (mostly wealthy) owners of that corporate stock: even with those rising piles of money sitting idle offshore, corporations aren’t investing it – so taxing them won’t make much difference to (genuine) investment. But government spending and investment – you know, to upgrade roads, improve schools and universities, and so on – will improve productivity and demand at the same time.”

From this all-important perspective, the clear implication is that in the current scenario, corporate tax cuts damage growth.

More on this here, or here, just for instance. Digest that bit in bold again: corporate tax cuts in the current environment of offshore cash piles in many countries are likely to hurt economic growth. And Plender agrees:

“To create a more robust economic recovery it would make sense in many countries to shift income from companies to households to encourage more consumption. Yet some of the biggest hoarders are doing the opposite.”

With a WHOLE lot more to come on this subject, in the next week or two.



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