New Reports Explain Why Cutting Corporate Taxes Won’t Help the Economy

All It Would Help is the Corporations

A fundamental plank in the Conservative philosophy for stimulating the economy is a cut in corporate income taxes.  Conservatives regularly point to what they see as the high rate of corporate taxes, and regularly proclaim that if we only cut corporate taxes business would invest and hire and all would be well.  Here is Mitt Romney on the subject

Our high corporate tax rate handicaps the overall U.S. economy in our competition with the rest of the world. It leaves individual American businesses with a smaller portion of their profits to reinvest. Studies have shown that it also hurts workers, by lowering the growth in productivity and wages. With a single bullet, we are somehow managing to shoot ourselves in the foot three times. We need to move to a lower rate. As president, Romney will press for an immediate reduction of the corporate tax rate from 35 to 25 percent.

And here are the facts.  Corporations have plenty of money, but they are holding these funds instead of investing them because of lack of demand for their products and services.

The Federal Reserve said in a quarterly snapshot of financial flows Friday that U.S. companies continued to accumulate profits instead of spending them. Holdings of cash and other liquid assets at nonfinancial companies rose to $2.047 trillion in April through June, up 4.5% compared to the first quarter. That was the highest level since the series began in 1945.

A good example of the problem is Best Buy.  Consumer electronics has been one of the economy’s growth areas, and nobody is better at selling consumer electronics than Best Buy.  So what is Best Buy doing?



Why The Expected Decline?
Lack of Customers - Not high taxes



Greg Melich of ISI Group expects the company to generate about $1.3 billion in free cash this year, adjusted for changes in working capital. That is equal to about 14% of the company's market value and sufficient to support buybacks under Best Buy's new, $5 billion share-repurchase program.

Now using its cash to buy back stock does put the money into the hands of consumers, but since a large portion of this will be spent on buying other financial assets, paying down debt or just holding the cash, the impact on the economy will be small.

So Best Buy doesn’t need a reduction in its tax bill to allow it to invest.  It needs more customers.

While buybacks can boost earnings per share by reducing shares outstanding, they aren't an antidote to declining cash from operations. Analysts don't expect operating income, a key component of free cash flow, to increase until the year ending in February 2014.

So Mitt and others, go ahead and cut the taxes of companies like Best Buy.  Just don’t expect any jobs to come about from it.  But of course, you probably don’t expect that anyway, it’s just a convenient ruse to justify a corporate tax cut.