Who Benefits From Lower Business Taxes?

A blogger at Mlive recently suggested that lower business tax rates do not "necessarily" create more jobs.

The post notes that Wisconsin congressman Paul Ryan and Michigan Gov. Rick Snyder have proposed federal and state budgets that lower overall business tax rates. (Although by also eliminating various tax subsidies, some companies would pay more under these proposals — attn. General Electric). To make the case against these plans, the piece cites a single academic economist and a union-funded think tank, who, not surprisingly, contend that business owners don’t use tax cuts to hire more workers but instead pocket the savings as increased profits.

(And then use the money to do what, stuff their mattresses? Even if this idea were correct, they might invest in other productive, job-creating enterprises.)

The post then describes a lobbyist’s poll of business owners in Michigan — hardly the hub of rewarding entrepreneurial risk-taking opportunity over the past decade. Fifty-two percent said they would use tax savings to “expand their business,” 48 percent to “add employees” and 50 percent would “realize the profits.” These responses are supposed to provide further evidence that corporate tax cuts mostly just fatten the wallets of business investors.

The piece concludes, "The majority of businesses use tax breaks to increase profits not create jobs… Nobody's saying that businesses shouldn't earn profits. But corporate tax breaks are being sold to the public as a means of generating job growth, and that doesn't seem to be the case."

"Doesn't seem to be the case"? Given this sweeping survey of economic thought and experience, why not then impose much higher taxes on businesses? Couldn’t politicians and government bureaucrats who are not motivated by the profit motive use the extra tax revenue to stimulate even more jobs by doling it out to firms they select solely on that basis? Taking this example to the extreme: Why does the government not institute a tax rate of 100 percent, rather than the Snyder proposal of 6 percent? After all, that lower business taxes generate job growth "doesn’t seem to be the case."

Alas, economic theory, empirical research and anecdotal evidence demonstrate that bureaucrats, disconnected from and ignorant of the industries they attempt to stimulate, greatly underperform business entrepreneurs who are motivated by the quest for profits.

Moreover, the quantity of jobs such government programs create are dwarfed by the jobs not created by those firms that are forced to pay higher tax rates. Mackinac Center researchers have found that states with fewer taxes have grown at 22.4 percent, while those with more extensive taxes grew at just 13.4 percent, from 2000 to 2009. Government programs end up as "balloon squeezing" exercises at best, and more often generate deadweight losses in the form of fewer jobs overall, slower economic growth, and over time, a relatively poorer population.

Just as individuals respond to changes in their personal financial situations, businesses, too, are affected. And taxing business will surely give us less of it.

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