Chandra Mishra Rides Astride a Trojan Horse

When Professor Mishra and I debated the Bush tax cuts a few weeks ago, we agreed to limit the debate to income taxes, but the Professor went a bit off-topic. He spent half his op-ed talking about corporate taxes, and I didn’t get a chance to respond.

Until now.

First, let’s see what I’m responding to:

A high corporate tax rate moves jobs overseas. Currently American companies are sitting on more than $2 trillion of cash overseas, which is used for hiring and investments in foreign operations.

The United States has the second highest corporate tax rate in the world. Two things we must do to spur job growth and expand the taxpayer base in the America: Cut the corporate tax rate from 35 percent to 20 percent, the median tax rate for the developed countries, and eliminate the taxes on repatriation of foreign earnings.

Wow. Every sentence there is either wrong or very misleading.  

Prof. Mishra is talking about “statutory” tax rates, but corporations hardly ever pay statutory rates. They use all sorts of deductions and exemptions and loopholes to pay a lot less than “the second highest corporate tax rate in the world.” When you measure what they actually pay — a.k.a. “effective” tax rates — you find that the United States has low corporate taxes, compared to the rest of the world:

According to Prof. Mishra, this “high corporate tax rate moves jobs overseas.” But, as tax journalist David Cay Johnston reports, “that is not General Electric’s experience”:

GE’s disclosures show that over the last decade it paid much lower tax rates in America than offshore, just the opposite of the Washington political mantra. Even more puzzling, the U.S. corporate giant chooses to take more of its profits in other lands despite the higher tax rates there.

Prof. Mishra never explains how high taxes move jobs overseas or why it’s a bad thing that “American companies are sitting on more than $2 trillion of cash overseas.” (I’m glad I’m not in his class.) My best guess is that he’s trying to say the following: If those companies bring that cash back to the U.S., they will use it for “hiring and investments” here.

Only one problem: American companies already have lots of cash, and they’re not using it for “hiring and investment.”

In late 2008, they started receiving more cash than they were investing:

As a result, American companies are no longer borrowing cash. They have so much excess that they’re lending it:

They don’t need more cash. If American companies do bring that $2 trillion back to our shores, they won’t use it “for hiring and investment.” They’ll buy back stock, pay bigger dividends, park it in Treasuries and other financial securities — nothing that will “spur job growth and expand the taxpayer base.”

It’s just another Trojan horse. Make corporate owners pay less taxes, and you’ll only enrich corporate owners. It won’t trickle down to the rest of us.

That’s what happened in 2004, when Congress temporarily allowed companies to repatriate foreign-earned income at a discounted rate of 3.7 percent. Usually, they have to pay the full rate, but they can “defer” that payment as long as they want. That’s why they’re “sitting on more than $2 trillion of cash overseas.” If they “repatriated” it to America, they’d have to pay more taxes. They’re hoping Congress will grant them another “holiday” like in 2004:

A study of the impacts of the tax break by Dhammika Dharmapala, C. Fritz Foley, and Kristin J. Forbes found, however, that “[r]ather than being associated with increased expenditures on domestic investment or employment, repatriations were associated with significantly higher levels of payouts to shareholders, mainly taking the form of share repurchases. Estimates imply that a $1 increase in repatriations was associated with an increase in payouts to shareholders of between $0.60 and $0.92, depending on the specification.” The authors suggest that companies were able to make these distributions to shareholders without violating the terms of the repatriation legislation by using the repatriated funds “to pay for investment, hiring, or R&D that was already planned, thereby releasing [domestic] cash that had previously been allocated for these purposes to be used for payouts to shareholders.”

And what little hiring they did do was quickly reversed:

  • Hewlett-Packard…”announced a repatriation of $14.5 billion, layoffs of 14,500 workers, and stock buybacks of more than $4 billion for the first half of 2005 – about three times the size of its buybacks in the period a year earlier.”
  • Pfizer, which repatriated around $37 billion (the largest amount of any firm) shortly before eliminating around 10,000 American jobs and closing U.S. factories in 2005;
  • Ford Motor Company, which repatriated around $850 million under the holiday and then laid off more than 30,000 U.S. workers in 2005 and 2006;
  • Merck, which repatriated $15.9 billion and announced layoffs of 7,000 workers in 2005;
  • Honeywell International, which repatriated $2.7 billion and laid off 2,000 workers in 2005 and 2006.

According to the Congressional Research Service, “most of the largest beneficiaries of the holiday actually cut jobs in 2005-06.” Congress lowered their taxes, and it didn’t help the economy one iota.

But that’s nothing new. As Robert McIntyre, Director of the nonprofit Citizens for Tax Justice, recently told Congress:

Over the years, my group has done numerous studies on corporate tax subsidies and their effect on corporate investment behavior and job creation. In all of these studies, we found no positive correlation between the amount of subsidies that companies received and their investment and jobs performance.

Wait. It gets worse.

In order to “expand the taxpayer base” and reduce the budget deficit, Prof. Mishra says we should “eliminate the taxes on repatriation of foreign earnings.” So riddle me this: How does eliminating taxes help us reduce the budget deficit?

Think about that until your head explodes.

Therein lies the most profound problem with Prof. Mishra’s argument: It all depends on the assumption that lowering tax rates will increase economic output so much that it increases tax revenue.

Historically, that’s completely false. The effective corporate tax rate has been falling for over fifty years:

Yet corporate tax revenue (as a percent of GDP) has been plummeting at the same time:

Enough for one day. I’ll talk more about tax rates-versus-revenue tomorrow.