Shocking Nobody, Corporations Say Tax Cuts Won’t Go to Workers

In response to a proposed reduction of tax rates on foreign earned profits, U.S. multinational companies expect to use savings from the proposed reduction to pay down debt, increase share buybacks and pay out more dividends.

In a Bank of America survey of corporations, the most common expected use of proceeds from foreign-earned profits was paying down debt. Surely business investment was next, right? No. The second most common expected use of proceeds was share buybacks.

 Well, it must have been third on the list? Nope. The third most common expected use of proceeds from tax savings on foreign earnings was mergers and acquisitions. Well, that’s okay because we all know that when companies buy other companies they retain all the employees (insert sarcastic tone here.) Capital expenditures finally came in at No. 4, followed by increasing dividends.

Who could have seen that coming? After all, when companies saw after-tax profits increase more than 950 percent from 1986 to 2016, they increased retained earnings more than 1400 percent and increased dividends more than 925 percent.

Yet, nonresidential business investment increased a paltry 380 percent, not even keeping up with GDP growth. Why didn’t business investment skyrocket? Why did companies keep more money in the form of retained earnings and increase dividends?

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Source: Solutionomics calculations using Bureau of Economic Analysis data

According to the National Economic Council Director Gary Cohn, that wasn’t supposed to happen. From 1986-2016, the effective corporate tax rate declined by nearly half. Gary Cohn would tell us that business investment should have increased far more, as he is promising us today.

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Source: Solutionomics calculations using Bureau of Economic Analysis data

Could it have something to do with the fact that companies were making so much money they literally didn’t know where to invest much of it, so they retained more of their profits and increased their dividends? Think about it: Business investment didn’t even keep up with GDP growth. That’s bad.

If companies today have near-record profits and record retained earnings, why would we expect anything different this time? Why would companies flush with more cash than they have ever had on hand suddenly increase business investment?

While some will increase business investment, if history is a guide, not all will, and many have said as much. Cisco’s CEO told Bloomberg, “We’ll be able to get much more aggressive on the share buyback.”

Small wonder so many companies didn’t have business investment at the top of their list of what they would do with a further increase in after tax corporate profits — they already have more cash than they seem to know what to do with.

Yet, Gary Cohn is convinced companies are going to plow their tax savings on foreign-earned profits into business investment. During a recent Wall Street Journal-sponsored event, the moderator asked attendees whether they would increase business investment if corporate tax rates were cut.

Much to Mr. Cohn’s surprise and dismay, very few hands went up. Cohn even asked, “Why aren’t the other hands up?” Somebody please let him know companies have more money than they know what to do with, at least the large companies. He might be shocked.

The most important insight I hope you take away is this: At least some companies need more customers than they need more cash. They need more investment opportunities, which come from increased customer demand.

Instead of unconditionally cutting the tax rate on foreign-earned profits, tie the reduced rates to increased hiring and wage growth. This would allow for larger consumer tax cuts providing companies with that they need, consumers with more cash to buy more company goods.

 

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This article first appeared on The Hill.com

Tax Plan Shows Congress Putting Donors Over Voters

During my most recent trip to Capitol Hill, there was a noticeably different feel in the air. It wasn’t just the ambient air temperature that had changed, there was a chill in the political air as well.

There was a distinct sense of desperation urgency to pass tax reform. House Republicans furiously marked-up H.R.1 and rushed to get it voted out of committee and then to pass it in the House.

Meanwhile, the Senate was also giving off a distinct sense of urgency and an air of desperation as it rushed to release something, filling in the details later. Speed, not sage policymaking was clearly the order of the day, and it has continued into this week.

What could create such a sense of urgency and desperation among a legislative body with a 90-percent-plus reelection rate? Donors, big donors. Rep. Chris Collins (R-N.Y.) was quoted as saying, “My donors are basically saying, ‘Get it done or don’t ever call me again.’”

In another highly revealing statement, Sen. Lindsey Graham (R-S.C.) posited that, “The financial contributions will stop.” The threat of big donor defections has congressional Republicans on edge.

Big donors want a return on their investment and like activist investors, they are making their tax wish lists known as well as the political ramifications of not delivering. This has led to highly dysfunctional House and Senate tax bills reflecting big donor demands at the expense of sound policy.

Eliminating the domestic production activities deduction

For all the talk of encouraging American jobs and manufacturing, it looks like the House is going to eliminate the domestic production activities deduction. Why? Because of its desperate need to offset tax cuts elsewhere.

Now, some may argue that this is okay because companies will receive a much bigger incentive via reducing the statutory rate from 35 percent to 20 percent. Not necessarily. There is nothing in H.R.1 that ties the reduction to domestic production.

Rather, companies can reduce production in the U.S. and see their tax rate nearly cut in half. That’s not an incentive, that’s policy negligence.

U.S. taxpayers subsidizing Japanese robotic manufacturers

The policy dysfunction doesn’t end there. As currently proposed, both the House and Senate bills could end up subsidizing the purchase of foreign-made robotics. While the idea behind full and immediate expensing of equipment purchases is that companies will invest more in equipment creating American jobs, that may not be the case.

What if the equipment purchased is produced by workers outside the U.S.? In 2016, Japan and Germany alone accounted for more than 50 percent of total industrial robot exports with the U.S. accounting for only 4.3 percent.

The U.S. just isn’t as dominant in robotics as some might think. Nine out of the 10 largest industrial robot manufacturers by industrial sales volume were based outside of the U.S. As currently written, companies would benefit from full and immediate expensing of purchases of foreign produced equipment, with no benefit to American workers.

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Source: Solutionmics, using data from World’s Top Exports

Foreign profit amnesty

Then there is the much talked about proposed reduction in taxes on previously earned foreign profits. Both the House and Senate propose significantly reducing the corporate tax rate on previously earned foreign profits. This is profit amnesty.

It exempts these profits from today’s current tax rates. Worse still, the tax cut is without conditions. Like the reduction in the statutory corporate tax rate, companies don’t have to create jobs or pay higher wages to benefit from the tax cut. That’s highly inefficient.

Donors over voters

According to a Pew Research Center poll, 52 percent of Americans say corporate tax rates should go up while only 24 percent support rate reductions. Yet, approximately two-thirds of the benefits of tax cuts would accrue to corporations.

The latest Senate tax bill is reported to make corporate tax cuts permanent and individual tax cuts temporary. The list goes on and on. What is really going on is that extreme big donor political pressure is leading to extremely inefficient tax policy with a $1.5 trillion price tag.

That is something we cannot afford, and we should at least be getting a better return on our investment.

 

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This article first appeared on The Hill.com

Reward Actual Job Creators Through Earned Corporate Tax Cuts

House Republicans recently released H.R.1 referred to as the “Tax Cuts and Jobs Act.” Unfortunately, the only part of the title that is a certainty is the tax cut portion. The jobs part is an uncertainty, merely speculation that jobs will be created.

While supporters of the bill promise it will create more jobs and even higher wages, there are no requirements for companies to increase hiring or raise wages to have their statutory tax rate reduced from 35 percent to 20 percent.  H.R.1 is a tax cut bill with a title that only implies it will create jobs.

As currently written, there is no guarantee that only companies creating jobs and paying higher wages will see a significant reduction in their tax rate. It is the equivalent of selling your house, handing the keys and title to the buyer and hoping they pay you.

Asking Americans to take on an additional $1.5 trillion in debt based solely on supporters promises that it will create more jobs is naïve at best. Americans deserve certainty. They deserve a better return on the proposed $1.5-trillion tax cut investment and it’s called the Earned Corporate Tax Cut or “ECTC.”

The ECTC would base each company’s tax rate on its rate of American job creation, wages and employee-provided health insurance. Companies that don’t increase hiring wouldn’t receive a tax cut and unlike H.R.1, companies that fire Americans certainly wouldn’t get a tax cut.

Determining each company’s tax rate would utilize a corporate tax cut “scorecard.” Congress and D.C. policymakers are used to “scoring.” How much of a tax cut each company would receive under the ECTC would simply involve scoring each company based on the following three factors:

First, only companies that increase U.S employment would receive a tax cut. Second, companies that pay higher wages would receive an additional tax cut. Third, companies providing employee health insurance would receive an additional tax cut.

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Source: Solutionomics

Determining corporate tax rates through this targeted scoring approach would do five things:

  • First, it would create real incentives to increasing hiring and wages. Under H.R.1, companies have less incentive to increase employment or wages because they will pay a lower tax rate whether or not they increase hiring and wages. If, however, lower tax rates were contingent on companies increasing hiring and wages companies would have a real incentive.
  • Second, if tax cuts were limited to companies increasing hiring and wages, larger tax cuts could be given to those companies as companies firing Americans would not siphon off tax cuts.
  • Third, targeted tax cuts would increase the employment and wage gains realized per tax-cut dollar producing a better return on tax cuts.
  • Fourth, it would lessen the decline in tax revenues as only companies creating American jobs would qualify for a lower tax rate.
  • Fifth, it would provide an incentive for companies to provide health insurance to their employees, reducing demands on government budgets.

All of this would be accomplished while securing the same, and possibly greater, employment and wage growth, as companies would have a real incentive to increase hiring and wages.

Some have argued this “scoring” approach would burden companies. Rather than a burden, it would only be a matter of companies sharing the information they already have. Companies know who they hire and fire, what they pay their employees and which employees receive company-provided health insurance.

Others have argued that companies may try to game the system and some may. However, a company trying to game the system does not change the fact that tying corporate tax cuts to company job creation and wages is more efficient than cutting corporate tax cuts unconditionally for all companies in the hope that jobs are created and wages increase.

Still, others have questioned whether Congress would pass a bill that makes tax cuts contingent on job creation and wages. Think of it this way: If you owned a business and you were told how to increase your return on investment but your management team wouldn’t implement the plan, would you give up on the plan? Of course not. Instead, you might change the management.

Promises of job creation are not enough. Americans deserve a better return on the proposed $1.5 trillion in additional debt they would be subjected to over the next 10 years.  Anything less would be a bad investment, and there is a much more efficient alternative, the Earned Corporate Tax Cut.

 

FOLLOW SOLUTIONOMICS ON TWITTER:  @Solutionomics

This article first appeared on The Hill.com

GOP Tax Plan A Swing And A Miss

The day after the World Series ended, House Republicans stepped up to the tax reform plate swinging for the fences. While they should be given credit for taking on a highly challenging subject, they missed the mark.

Instead of drastically reducing the statutory corporate tax rate from 35 percent to 20 percent, as proposed, and generally focusing on increasing corporate cash, changing up their focus to increasing consumer purchasing power would have fit better with economic reality.

Many companies need more customers — and customers with cash — more than they need more cash on their balance sheets. Recent history makes this point.

In 2000, the tax rate paid by companies after all deductions, known as the “effective corporate tax rate,” was 29.4 percent. In 2016, the effective corporate tax rate was 18.6 percent. Not surprisingly, corporate profits after taxes increased 250 percent during the same period as companies kept more of their profits.

You would expect, based on today’s arguments for cutting the corporate tax rate, that business investment would have skyrocketed during the same period, but it didn’t. While corporate profits after taxes increased 250 percent, nonresidential business investment increased  by just 55 percent.

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Source: Solutionomics, Bureau of Economic Analysis

What happened?  Instead of business investment skyrocketing as promised, net corporate dividend payments increased 233% from 2000 to 2016 and undistributed corporate profits increased 626%  during the same period.

Rather than leading to skyrocketing business investment, corporate dividends and undistributed corporate profits experienced outsized growth. It seems companies didn’t have enough good investment opportunities.

Source: Solutionomics, Bureau of Economic Analysis

Why did companies increase dividends and undistributed corporate profits? Because they didn’t have an equal increase in demand.

From 2000 to 2016, personal consumption expenditures, a measure of the goods and services purchased on behalf of persons in the U.S., only increased 90 percent during the period when corporate profits after taxes increased 233 percent.

That is why companies instead increased dividend payouts and retained more of the after-tax profits. It makes sense. Would a corporation increase investment just because tax rates significantly decreased if consumption didn’t also significantly increase?

Imagine a CEO telling his board of directors that he was significantly increasing production of widgets because tax rates were significantly lower while consumption was not significantly higher.

A second argument for corporate tax cuts is that they will increase employment as companies use their increased after-tax profits to increase hiring, but that too hasn’t been the case. What happened to the rate of employment growth when the effective tax rate was lowered from 2000-2016? It declined.

The average annual employment growth rate from 2000-2016 was 0.6 percent. Even if we take out the years of negative employment during the great financial crisis, the average rate of employment growth was only 1.1 percent.

During the previous 17-year period from 1983-1999, the average annual employment growth rate was 2 percent, a period when the average effective corporate tax rate was 27.3 percent, much higher than the 19.5 percent average during the 2000-2016 period.

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Source: Solutionomics, Bureau of Labor Statistics

Some may say these facts mean we shouldn’t cut the corporate tax rate, seeing it as an either/or proposition. There is a solution that both provides for the possibility of stimulating economic growth through lower corporate tax rates and ensuring tax cuts only occur in conjunction with job growth: Make lower corporate tax rates contingent on increased employment.

If a company increases hiring, its tax rate is lowered; if it doesn’t, it isn’t. It’s simple: No jobs, no tax cuts. That’s a common sense solution.

FOLLOW SOLUTIONOMICS ON TWITTER:  @Solutionomics

This article first appeared on The Hill.com

Hope Is Not A Corporate Tax Policy

Hope is not a corporate tax policy, yet the tax cuts President Donald Trump proposed at a Missouri rally Wednesday are exactly that—tax cuts based on hope. Trump and House Republicans hope that by reducing corporate tax rates, companies will in turn take the money saved in taxes and hire Americans. Yet they do not require companies receiving the tax cuts to hire Americans.

Under current proposals outlined in the speech, a company could eliminate American jobs, open operations overseas, and receive the same tax cuts as companies maintaining employment in America or companies creating jobs in America. The result is that all companies would receive the tax cut, whether or not they create jobs here at home. With a nearly $20 trillion dollar national debt, we no longer have the luxury of implementing universal and unconditional corporate tax cuts in the hope that companies use the tax savings to create jobs.

Instead of a hope-based corporate tax policy, we need a jobs-based corporate tax policy. We need a policy in which each company’s corporate tax rate is based on each company’s rate of job creation. We need a more strategic, results-driven tax policy in which tax cuts are tied to increased American employment, not the hope of job creation.

Universal corporate tax cuts, independent of the number of the jobs each company creates, are a highly inefficient policy. Providing tax cuts to companies eliminating American jobs reduces the magnitude of tax breaks available to companies creating jobs. Under current proposals, rather than allocating tax cuts only to job creators, tax cuts could be siphoned off and given to companies eliminating jobs in America, thereby reducing the tax cuts available for companies creating jobs. Unconditional tax cuts also would create disincentives to job creation. If companies calculate they are going to receive tax cuts whether they create jobs or not, there is no incentive to increase employment.

Implementing a jobs-based corporate tax policy would also address the hotly debated taxation of profits held overseas by American corporations. If each company’s corporate tax rate were tied to each company’s rate of job creation, companies could lower their tax rate on repatriated foreign-earned profits by increasing American employment. If the theory of lowering the tax rate on income earned overseas is that it will create American jobs, then tie the tax rate to actual jobs created.

A jobs-based tax policy would also be more efficient than a policy of immediate and 100% deductibility of capital investment. The idea behind current proposals for this is to spur investment. But what if a company builds a facility with foreign-sourced steel and fills the facility with foreign-made equipment instead of U.S.-made equipment? Under current proposals, American tax cuts could subsidize the purchase of these foreign-made goods. Instead of tying tax policy to capital investment that may or may not increase American employment, tie corporate tax rates to company hiring. Simply, if a company increases its American employment it pays a lower rate; if it doesn’t it won’t.

Questions surrounding outsourcing and H-1B visas would also be addressed. Companies outsourcing American jobs would pay a higher tax rate than companies maintaining American employment levels, creating an incentive to not cut jobs. A jobs-dependent corporate tax policy would also provide an incentive to companies currently using or considering H-1B visas to instead fill positions with Americans.

Rather than debating how much the corporate tax rate should be cut, policymakers in Washington first need to ensure that corporate tax cuts are actually doing what they’re supposed to do.

 

This article first appeared on Fortune.com and Yahoo Finance.com

Make Corporate Tax Cuts Conditional On Benefits to Workers

Republicans have proposed reducing the statutory corporate tax rate from 35 percent to 20 percent. While the statutory rate gets all the headlines, it is like the manufacturer’s suggested retail price (MSRP) — the actual rate is much lower.

In fact, despite lowering the statutory corporate tax rate, if companies paid the 20-percent rate and all current tax deductions available to companies were eliminated, the tax rate paid by companies would increase — yes, increase.

Based on Bureau of Economic Analysis data, the average rate actually paid by companies was 18.6 percent in 2016 and averaged 19.5 percent since 2000.

If we had a 20-percent corporate statutory tax rate and companies paid the 20-percent rate without the current tax deductions, the average tax rate paid by companies would have been higher than what they paid in nine of the last 17 years.

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(Source: Solutionomics and the Bureau of Economic Analysis)

Now, we all know that good lobbying on behalf of significant campaign contributors will ensure that many corporate tax deductions will remain in place. Rather than playing this game of, “We are going to lower the statutory rate but also eliminate deductions,” let’s just be honest: The actual corporate tax rate companies are paying is going down.

If that is the case, let’s make sure lower tax rates go to companies creating jobs in America, companies that are paying higher wages, companies providing employer-funded health insurance and to small business owners.

If the goal of corporate tax cuts is job creation, we need to make tax cuts contingent on job creation. We must base each company’s tax rate on its rate of job creation.

This would be very different from current proposals, which would give the same tax cut to companies firing Americans and sending jobs overseas as is given to companies creating American jobs — that’s irresponsible policy.

Ford is moving production of its Focus to China, while Toyota and Mazda are looking to build new plants in the U.S. Why would we give the same tax break to Ford as to Toyota and Mazda?

Next, if the goal of corporate tax cuts is higher wages, we should tie each company’s corporate tax rate to its wages relative to its competitors. Companies paying higher wages have earned a tax break; companies paying the lowest wages have not.

The average wage of Costco’s cashier positions listed on Payscale.com was $13.45 per hour while Sam’s Club’s average was $10.07. Why would we give the same tax break to Sam’s Club as we would to Costco?

Tax reform can also be tied to health-care reform. Companies that provide health insurance to their employees reduce the demands on government-provided health insurance, thus reducing government spending. Company-provided health insurance can also increase consumer purchasing power by reducing the dollars consumers need to allocate to purchasing health insurance.

Given the broad potential impact of company-provided health insurance on economic growth, we can obtain a greater return on our corporate tax cuts if we tie each company’s tax rate to whether it provides health insurance to its employees.

In 2014, Target eliminated health insurance coverage for part-time workers while Costco maintained health insurance. Why would we give the same tax break to Target as we would to Costco?

Last, small business owners need help. Tie each company’s corporate tax rate to its percentage of employees based in the U.S. This would disproportionately benefit small businesses because they would generally be expected to have a higher percentage of their workforce based in the U.S.

As a result, they would pay a lower tax rate than large, multinationals with more globally-based employees. Company-offshoring-decisions would also be impacted.

Companies offshoring American jobs leading to a net reduction in their American employee base would pay a higher tax rate than companies maintaining the number of Americans employed, thus creating an incentive to maintain their American employment levels.

While lowering the statutory corporate tax rate from 35 to 20 percent is getting all the headlines, the real question is why aren’t the tax cuts conditional? We need a better return on the proposed tax cuts. We need targeted tax cuts that are tied to company actions, not lobbyists’ actions.

 

This article first appeared on The Hill.com

SOLUTION: Tie Bank Bonuses to Loan Repayments

Some argue that we need to limit how much bank executives are paid. While doing so may be emotionally satisfying, the reality is that how much bankers get paid, doesn’t matter…as much, as tying what they get paid to the quality of the loans they make.

We are focusing on the wrong question when we focus on how much bankers get paid. The problem isn’t how much bankers are paid; the problem is the basis on which they are paid. The problem is that today bank pay is based on the quantity of loans they make, not quality of the loans. Add to this that they are making loans with other people’s money,  your money, the hard- earned money you deposit at banks, and it becomes clear that very little will change and we will continue to be at risk of experiencing future financial crises and bank bailouts until bank executives are paid based on loan quality, not quantity. So, what specifically needs to change?

1st, Base bank pay on how many loans are repaid in full:  The more loans that are repaid, the more bankers get paid. It is time to tie bank pay to loan repayments.

2nd, Bankers’ bonuses are received after loans are paid back. Today, they make the loans and get their bonuses before the loans are repaid.  Currently they are getting paid based on loan quantity, not loan performance.

Only when bank pay is tied to the amount of loans repaid in full, and after loans are repaid,  will we have a real chance to reduce the bad loans that cause financial crises.

Remember, while restricting banker compensation may be emotionally satisfying, it is not as effective as tying how much they make to the quality of the loans they make.


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Financial Regulations Are About Preserving Liquidity, Not Limiting It

The primary argument against financial regulation is that it reduces lending.  That is a misunderstanding of the purpose of financial regulation.  The purpose of financial regulation is to maintain a stable supply of consumer and business loans, especially when we need it most, during economic downturns.

My father was a small business owner and used to say that when you needed loans the most, you couldn’t get them and when you didn’t need them, banks would send you crystal bowls for the Holidays and heap lending offers on you.  That is why we need some financial regulation – to increase the availability of loans when they are needed most

When do we need loans the most?  During recessions, not when the economy is doing fine, companies are profitable, and when banks are ready, willing and able to lend.  It’s like antibiotics; you don’t want to take them when you don’t need them because then you won’t have any left when you actually need them the most. Yet that is what we do in our financial system.  We heap on more loans when the economy is doing well, overheating the economy and reducing the capacity of banks to lend during economic downturns.

What does make sense is preserving lending capacity for a rainy day, otherwise known as the next recession.  If we did this, banks would have more lending capacity when we need it most, during recessions.  And if regulators also reduced reserve requirements during recessions, banks would have even more lending capacity when we most need it.

So while you can have too much financial regulation, we first need to understand that the purpose of financial regulation is to preserve lending capacity when we need it most, during recessions.

 


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New Yorkers Have A Right to be Salty Over SALT Deduction Repeal

New York receives 81 cents for every dollar it pays in federal taxes. Contrast that with South Carolina, which receives $1.71 for every dollar it pays in federal taxes.

Yet, through its proposed repeal of state and local tax (SALT) deductions, the current Senate tax bill would have New Yorkers pay even more to the federal government. But this isn’t just a question of state equality, it’s a question of bad economics for the country.

Would you invest in a company run by managers allowing its subsidiaries earning the least to use pricing discounts to steal customers from its subsidiaries earning the most? What if you found out that, worse still, the pricing discounts used to steal the customers were in effect subsidized by the subsidiaries earning the most for the company?

Well, that is what Congress is allowing to happen today. Low-SALT states like South Carolina are stealing higher-earning jobs from states like Washington using state tax breaks subsidized by high-SALT states like New York, and the current Senate tax bill would make it worse.

Consider the case of South Carolina, New York, Washington state and Boeing. As part of its effort to poach Boeing jobs from the state of Washington, South Carolina provided an estimated $900 million in corporate tax incentives, and that doesn’t include approximately $33 million in worker training to be provided by the state.

How could South Carolina afford that type of incentive? For every dollar paid in federal taxes, South Carolina received $1.71 in federal funds equating to $23 billion more than it paid into the system. Talk about a great return on “investment.”

Could South Carolina have afforded nearly $1 billion in tax breaks for Boeing without the $23 billion in federal subsidies? Conversely, New Yorkers paid nearly $48 billion more in federal taxes than they received in federal funds, in effect subsidizing the tax incentives South Carolina used to poach jobs from the state of Washington.

Besides the inequity among South Carolina and New York, what did the country get for this? The country got a nearly 33-percent reduction in worker pay.

When South Carolina, in effect, used federal tax dollars to poach Boeing jobs from the state of Washington, the country saw a nearly 33-percent — or more than $10-per-hour — reduction in wage levels. Boeing’s Washington-based jobs paid $32.05 an hour while the Boeing jobs in South Carolina paid $20.59 an hour.

Let me summarize this for you:

  1. New Yorkers sent nearly $48 billion more dollars to Washington, D.C. in 2015 than they received from D.C.
  2. South Carolinians receive $23 billion more from D.C. than they paid in federal taxes.
  3. South Carolina provided nearly $1 billion in incentives to poach Boeing jobs from the state of Washington.
  4. Boeing employee wages were reduced nearly 33 percent, or more than $10 per hour.

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Source: Solutionomics

Would a CEO let its lower-earning divisions use funds from its higher-earning divisions to siphon off business from its higher-earning divisions? Of course not, but that is effectively what we are doing when low-SALT states poach jobs from higher-wage states, all in effect subsidized by high-SALT states.

Yet, the current Senate tax bill would exacerbate the problem by repealing SALT deductions. While Rep. Peter King (R-N.Y.) is justified in his anger, Americans should be equally concerned about the Senate’s proposal to exacerbate the problem further.

We need smart tax reform that will increase wages, not further subsidize low-SALT states poaching jobs from higher-paying states. China already does a good enough job of siphoning off our higher-paying jobs.

 

FOLLOW SOLUTIONOMICS ON TWITTER:  @Solutionomics

This article first appeared on The Hill.com

New Yorkers Have A Right to be Salty Over SALT Deduction Repeal

New York receives 81 cents for every dollar it pays in federal taxes. Contrast that with South Carolina, which receives $1.71 for every dollar it pays in federal taxes.

Yet, through its proposed repeal of state and local tax (SALT) deductions, the current Senate tax bill would have New Yorkers pay even more to the federal government. But this isn’t just a question of state equality, it’s a question of bad economics for the country.

Would you invest in a company run by managers allowing its subsidiaries earning the least to use pricing discounts to steal customers from its subsidiaries earning the most? What if you found out that, worse still, the pricing discounts used to steal the customers were in effect subsidized by the subsidiaries earning the most for the company?

 

Well, that is what Congress is allowing to happen today. Low-SALT states like South Carolina are stealing higher-earning jobs from states like Washington using state tax breaks subsidized by high-SALT states like New York, and the current Senate tax bill would make it worse.

Consider the case of South Carolina, New York, Washington state and Boeing. As part of its effort to poach Boeing jobs from the state of Washington, South Carolina provided an estimated $900 million in corporate tax incentives, and that doesn’t include approximately $33 million in worker training to be provided by the state.

How could South Carolina afford that type of incentive? For every dollar paid in federal taxes, South Carolina received $1.71 in federal funds equating to $23 billion more than it paid into the system. Talk about a great return on “investment.”

Could South Carolina have afforded nearly $1 billion in tax breaks for Boeing without the $23 billion in federal subsidies? Conversely, New Yorkers paid nearly $48 billion more in federal taxes than they received in federal funds, in effect subsidizing the tax incentives South Carolina used to poach jobs from the state of Washington.

Besides the inequity among South Carolina and New York, what did the country get for this? The country got a nearly 33-percent reduction in worker pay.

When South Carolina, in effect, used federal tax dollars to poach Boeing jobs from the state of Washington, the country saw a nearly 33-percent — or more than $10-per-hour — reduction in wage levels. Boeing’s Washington-based jobs paid $32.05 an hour while the Boeing jobs in South Carolina paid $20.59 an hour.

Let me summarize this for you:

  1. New Yorkers sent nearly $48 billion more dollars to Washington, D.C. in 2015 than they received from D.C.
  2. South Carolinians receive $23 billion more from D.C. than they paid in federal taxes.
  3. South Carolina provided nearly $1 billion in incentives to poach Boeing jobs from the state of Washington.
  4. Boeing employee wages were reduced nearly 33 percent, or more than $10 per hour.

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Source: Solutionomics

Would a CEO let its lower-earning divisions use funds from its higher-earning divisions to siphon off business from its higher-earning divisions? Of course not, but that is effectively what we are doing when low-SALT states poach jobs from higher-wage states, all in effect subsidized by high-SALT states.

Yet, the current Senate tax bill would exacerbate the problem by repealing SALT deductions. While Rep. Peter King (R-N.Y.) is justified in his anger, Americans should be equally concerned about the Senate’s proposal to exacerbate the problem further.

We need smart tax reform that will increase wages, not further subsidize low-SALT states poaching jobs from higher-paying states. China already does a good enough job of siphoning off our higher-paying jobs.

 

FOLLOW SOLUTIONOMICS ON TWITTER:  @Solutionomics

This article first appeared on The Hill.com