Friday, July 20, 2012

Cutting Taxes on Businesses Probably Won't Make Them Hire More

Something I frequently hear Republicans frequently say is that businesses are taxed far too heavily, and that reducing their tax burdens will induce hiring in our current slump. There are a lot of reasons why I'm sort of skeptical of this claim, so I'll run down the list one by one. 

First, imagine that you're a business owner. Imagine that you're employing, say, 20 people right now. You run a car wash, or something. Now imagine that, because of the economy, business is a bit slower than usual, so you only use about 60% of your workforce's capacity. Now imagine that the government comes and says, "Oh, hey, all businesses only have to pay half as much in corporate taxes this year, hope this makes you guys want to hire!" Now stop. If you're only using 60% of your workforce because of insufficient demand for your services, how would paying less in taxes make you want to hire more workers? The only way you'd hire more workers is if you were already using your workers at full capacity, which most firms are not doing right now. This is a huge reason why I'm skeptical that cutting business taxes is an appropriate form of stimulus right now. U.S. companies aren't desperate for cash--they're sitting on over a trillion dollars right now.

Now, don't get me wrong, I'm not trying to say that cutting taxes on businesses won't ever work to induce hiring. I just don't think it would work right now, because so many businesses have so much excess workforce capacity, since there's a lack of demand for goods and services. If you don't believe me based on my little thought experiment, (I don't blame you if you don't, because who the hell am I to say what's what?) the Congressional Budget Office has a paper out about strategies for economic growth, and this is what they had to say about tax cuts for businesses:
"Increasing the after-tax income of businesses typically does not create much incentive for them to hire more workers in order to produce more, because production depends principally on their ability to sell their products."
I couldn't have said it better myself. 

A much better strategy (if you feel the need to stick with tax cuts), I think, is to cut them for individuals. Individuals don't need to fully utilize their workforce capacity for those tax cuts to work, they just consume more with the extra cash they have on hand. Tax cuts aren't really my favorite form of stimulus, but if you must use them to get us out of this slump, cut them on people, not businesses. Personally, I'd like to see the government provide aid to the states so they can hire back the teachers, cops, and firefighters that they've had to lay off. That'd be a quick and easy way to put money to good use, I think. Or the Fed could do something. You know, because Bernanke totally said that a) the current economic conditions were bad and, b) that the Fed was ready and able to do something to help stimulate the economy further.

Then it didn't.