RALPH  KENYON
EXTRAPOLATOR
BACK

This page was updated by Ralph Kenyon on 2018-02-07 at 03:20 and has been accessed 34 times at 11 hits per month.

Labor and the trickled down lie

People think that the fact that Corporations hire millions of people is sufficient cause to give them tax breaks.  They reason (erroneously) that because they hire people they will hire more people if they pay less taxes.  They reason that if they get more money because they pay less taxes, they will naturally hire more people.  This naive and overly simplistic view, aside from being based on logical fallacies, fails to take into consideration the primary motivation of corporations.  As labor is a major expense, an important corporate goal is to reduce the cost of labor.  I worked in the Defense Supply Agency on the team supervising large and small government procurement contracts, as well as with two major GE businesses, where my job was outsourced offshore by dictate of Jack Welch both times. I earned a Masters degree in Human Resources Management,*  before leaving the Navy, that taught me much about budgeting, labor, government, management, and several other fundamental aspects of organizational behavior.  The program was based on the Navy's Officer Leadership and Management course and was much more than personnel management. Why do people fall for the trickle down lie?

Corporations employ many millions of people. That much of the simplistic view is true. Corporate motives are to maximize return on investment for their investors (owners and stockholders) - in a word, profit. Labor is a cost on the financial ledger. CEO's are under great pressure to minimize that cost. The rise of labor unions raised labor costs. Corporations fought back with union-busting, in the beginning with violence.  When the government labor department made such acts a crime, the corporations fought back with propaganda, legal action, and lobbying for right to work laws and Federal and State level regulations.  They won in several states.

Corporations also incentiveized upper corporate management with huge bonuses to increase profit. As the propaganda against unions took hold in the culture, and non-violent union suppression tactics succeeded, unions were reduced and made sufficiently ineffective that wages pretty much stopped rising.  Lobbying prevented raising the federal minimum wage adequately, keeping the majority of workers at or below the 1980 level of buying power, but that was still too much for the corporate profit motive. First there was moving production offshore and outsourcing to take advantage of lower labor costs.  Not just labor was affected.  So much manufacturing went offshore that the US moved from a manufacturing economy to a service economy. Coaching and dance teaching is just once such. Then there was automation and, more recently, robotics and artificial intelligence, both costing technological jobs and increasing profits.  Meanwhile, the last 37* years left workers with lower stagnant buying power and lower paying jobs.  Even the lower paying service and high skill jobs have been "outsourced" to foreign workers brought in by temporary work visas.

In this environment, how do tax changes influence corporate decisions?  Corporations have working capital - cash - to cover operations, and the surplus is invested in financial instruments.

When taxes go up, corporate incentive is to avoid paying the tax by finding deductible expenses.  The incentive to reduce the tax burden is to find more ways to avoid the taxes.  It's a good time to invest some of the capital, in expansion, starting new businesses, and hiring more employees. These are deductible expenses, on which no tax is paid. The net result is decreasing the tax burden.  The benefit is increased production and expansion, which grows the business, sells more, and boosts the economy. This shows up in the economy as lowered employment, increased worker spending, and, did I mention, boosts the economy. Clinton raised taxes, resulting in eliminating the deficit and creating a booming economy that produced a government budget surplus.

When taxes go down, Corporate incentive is to take advantage of the lower tax cost on the interest on the working capital and surplus. Lower taxes means immediate increase in the after tax return on investment on the working capital and surplus. With the historically fickle government on taxes, the incentive is to take advantage of the lower taxes "while the getting is good".  Who knows when Congress will change their minds and increase the taxes again?  To take advantage of this "windfall" the corporate incentive is to wait on hiring and expansion - and allow the surplus to grow.  Put on a hiring freeze and a hold on expansion.  This shows up as increased unemployment in the very next year, decreased worker spending, and, did I mention, slowing the economy. Ronald Reagan's first tax cut, from 70% to 69.25% was followed by .2% increase in unemployment.  The next year he cut taxes from 69.25% to 50%, which was followed by a full 2.4% unemployment increase, and began the recession.  Bush took Clinton's surplus and gave it away in another tax cut, causing another recession.

No government tax cut has every paid for itself, so every tax cut has increased the national debt*.  Moreover, when taxes were raised, and the deficit turned into a surplus, the conservative Republicans have given that away to those whose taxes rates are highest, increasing the massive wealth and income disparity.



Ralph E Kenyon Jr.
191 White Oaks Road
Williamstown, MA 01267