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Cut Corporate Taxes, Discourage Hiring

December 5, 2017

Once upon a time, somebody proposed the elimination of the charitable deduction against income for US Federal income taxes. Doing so makes a lot of sense; it has little economic rationale, exists largely to benefit the very wealthy, and the "charitable" label is used to reduce taxes for many reasons that are not very altruistic.

 

 

 

In any case, this proposal was never more than symbolic; the charitable deduction is the true third rail of our politics. But the resultant cries of the non-profit industry got me thinking - if eliminating the deduction would reduce giving, wouldn't increasing marginal rates increase giving? No reason to think this isn't the case, and we have as evidence the heavy use of charitable giving from estates, which are taxed at higher rates than ordinary income.

 

But there is a parallel between this story and our current tax bill. Let's consider a company that desires to hire a new worker. Let's say that the total pre-tax cost (salary, benefits, etc.) of this hire is $100,000. However, this entire amount will increase the company's expenses and therefore reduce the tax bill. With a current top federal rate of 35%, the after-tax cost to the companies shareholders of this hire are therefore only $65,000 (actually closer to $72,500 if you include employer's portion of withholding taxes).

 

Let's say you reduce the corporate tax rate to 20%. Mechanically, this will increase the true cost of your higher to $80,000 (or $87,500 withholding). This reduction in rates has actually increased your cost of hiring by a whopping 23%. Even if you believe that such a tax cut will improve capital flows and stocks (which I doubt - the country is already awash in capital), the increased cost of hiring will greatly counteract any effect this will have on employment. Giving existing workers a raise will be disincentivized in the same manner, as compared to current policy.

 

And it gets worse - this bill companies to (temporarily) expense new investments in various types of equipment, thus reducing the after-tax cost of this type of spending. Much of this equipment will be of exactly the sort that, in, say, a manufacturing plant or a coal mine, replace human workers. So, the GOP position is that increasing the cost of paying people while reducing the costs of buying machines to replace them will help workers.

 

Either I'm missing something, or the GOP cares a lot more about helping people wealthy enough to stock their factories with a lot of machines.

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