The Missing Links

Critics of corporate tax reform reveal an economic myopia that either reflects an abundance of ignorance or a willingness to engage in deception.  The primary criticism of the corporate tax reform contained in the just enacted legislation is that the lower tax rate, the territorial tax approach to foreign earnings, and the incentive to repatriate about $2 trillion will benefit corporations, their executives and shareholders but not workers.  That charge shows at best a lack of understanding of how an economy operates.

When corporations get an infusion of revenue from lower taxes, they don’t reward the entitled few and lock the rest of it away.  Increased revenue is used to invest, to reward workers, and reward shareholders through share buybacks and dividend increases.

If companies invest in either new equipment, new projects, or new technology, they send money to other companies and that benefits the workers who make the equipment or carry out the new projects.  The companies on the receiving end of those investments go through the same process of investing, hiring, or rewarding shareholders.  All those actions benefit the economy.

As companies expand from new investment, they hire more workers who then spend and invest.  The benefits to economic growth are positive.  Most analyses of the just passed tax legislation estimate that the economy will grow by an additional 2%-3%.  Economic analysis also shows that labor benefits from lower tax rates.  Glen Hubbard, former chair of the Council of Economic Advisers and Dean of the Columbia School of Business has made that point clearly and cited a recent Berkley and Boston University study that showed wages increasing 8%.  This is consistent with other analyses showing the impact of taxes on wages.

If companies engage in share buybacks, they make shareholders wealthier and pension funds containing their stock richer.  The recipients of buyback money will either reinvest it in another company, spend their increased wealth, or do both.  In either case, the money gets into the economy.  Richer pension funds enable workers to have larger pensions which they will choose to spend and/or invest.

The bottom line is that increased corporate revenue from lower taxes leads to more employment and stronger economic growth.  Arguments to the contrary show an economic myopia.  Looking at only one link in a chain tells you nothing about the length and strength of the chain.


Founder and president of Solutions Consulting which focuses on public policy issues, strategic planning, and strategic communications.

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