A lower effective corporate tax rate is associated with a lower rate of job creation: new research

We’re often told that cutting corporate tax rates will lead to the creation of more jobs. We all want to see more jobs created but what does the evidence say about that? Australian economist and Member of Parliament Andrew Leigh has recently published new research on the subject which makes for interesting reading. His research looks at data for 1,000 profitable Australian firms, comparing their tax rates with the pace of job creation. The data shows that companies that pay less tax actually tend to create fewer jobs. We’re re-posting below part of a blog on his new research, available in full on the inequality.org website here. We encourage you to read the whole thing. As Andrew Leigh writes:

One of the chief arguments that the [Australian] government makes for a lower corporate tax rate is that it would spur job creation. As a Labor Party member of the Australian Parliament and a former research economist, I was curious to test the claim that companies which pay less tax create more jobs. Looking across large U.S. firms, Sarah Anderson and Sam Pizzigati’s analysis for the Institute for Policy Studies found no evidence that companies which paid a lower effective rate of tax generated higher levels of employment. If anything, the relationship was the opposite — the low-tax firms generated fewer jobs (though they did pay their executives more).

Using data for about 1,000 profitable Australian firms, I compared effective tax rates with the pace of job creation at each company.”

Now here’s a blog he wrote for inequality.org published earlier today that challenges the claims that lower corporate tax rates result in more jobs. This should make finance ministers of every country sit up and think again before they rush headlong in a race-to-the-bottom on lowering corporate tax rates that will lead to misery for millions as more and more public services are cut as a result:

As Australia’s conservative government tried to legislate a cut in the company tax rate for large firms, the Business Council of Australia stepped up to help. Attempting to persuade minor party representatives in the Senate, the lobby group circulated a letter last month signed by ten CEOs. They pledged that if the corporate tax rate were cut, then they would “commit to invest more in Australia which will lead to employing more Australians and therefore stronger wage growth as the tax cut takes effect.”

Unfortunately for the Business Council of Australia, someone in their organization then leaked the letter’s first draft. In the original version, CEOs would have pledged to create more jobs, to avoid the offshoring of jobs, to increase wages, and to pay their taxes. But they balked, and the Business Council ended up putting a red line through these stronger promises.

To make matters worse, it was also revealed that the Business Council of Australia had conducted a confidential survey of its CEOs. Asked what they would do with the money from a corporate rate cut, only one in six corporate bosses said they would spend it on employment or wages. Upon seeing the results, the Council decided not to release them to the public. Again, they were leaked.

Like the United States, Australia has been debating cutting corporate tax rates. Malcolm Turnbull’s conservative government announced in 2016 that it would attempt to lower the rate for large firms from 30 percent to 25 percent. The cut has passed the House, but the government does not yet have the numbers in the Senate.