Debunking the Nirvana of Corporate Tax Cuts

Nirvana is a transcendent state in which there is neither suffering, desire, nor sense of self, and the subject is released from the effects of karma and the cycle of death and rebirth.  It represents the final goal of Buddhism.  It has been purported that lowering current taxes paid by U.S. corporations, among other things, will send a huge surplus to their bottom line and, thus, will lead to higher profits, which will serve to justify the current melt up in U.S. stock markets.  A kind of tax nirvana.  While I do not want to minimize the benefits of lower taxation, with regards to the current tax proposals under consideration, I question the efficacy of the purported benefits.  Let’s examine their claims more closely.

First, corporations, all businesses for that matter, have been saying for decades that they do not pay the income tax.  They pass the cost of the tax on to their customers.  Have you not heard the same?  While this might sound intuitive as all costs, including the cost of capital, must be covered in the price paid by customers or the business in question will go bankrupt, it is in actuality impossible for any business in a competitive environment, or person for that matter, to pass along their costs.  If it were possible there would be no need to take measures in cutting any costs, nor any reason not to raise the price of one’s products and/or services to infinity.  No company would ever go bankrupt if the demand for its services were, in economic terms, inelastic, or impervious to cost increases.

Hans-Hermann Hoppe points out that, taken as a whole, and all else equal, it is production that must bear the cost of any taxation.  Consider two shipwreck survivors stranded on an island.  One is adept at building shelter, fashioning clothing from tropical foliage, as well as hunting, gathering and producing clean food and water for consumption.  The other has a gun, plenty of ammunition, and forms their own government of one.  Island production is less than half of what it would be otherwise.  The government of one is producing nothing and the remaining producer will produce less than he would absent the effective 50%, or more, tax rate he must now be subject to.  Tax anything and you will get less of it and there is no way to pass that tax cost on.

…if one is logically committed to assuming demand to be given whenever one tries to answer the question whether or not a tax can be shifted forward, every tax must be interpreted as an event that exclusively affects the supply side: it reduces the supplies at the disposal of suppliers.  Any other conclusion would amount to a denial of what had been assumed from the outset—that a tax had indeed been imposed and perceived as such by producers. To say that only the supply curve is shifted whenever a tax is extracted (while the demand curve remains the same as before) is to say nothing else than that the entire tax-burden must in fact be absorbed by the suppliers.
Hoppe, Hans-Hermann. The Economics and Ethics of Private Property: Studies in Political Economy and Philosophy, 2nd Edition (Kindle Locations 560-585). Ludwig von Mises Institute. Kindle Edition.

Any increase in taxation will, all else equal, decrease the supply of products available to consumers.  The amount of wealth accumulation on our island example will be less than it would be otherwise.  Alternatively, lower taxes lead to a greater supply of goods and greater wealth.

There can be no doubt, then, that taxes invariably reduce production and with this the consumer’s standard of living. Whichever way things are put, there is no escaping the conclusion that taxation is a means of obstructing the formation of wealth and thereby creating relative impoverishment.
Hoppe, Hans-Hermann. The Economics and Ethics of Private Property: Studies in Political Economy and Philosophy, 2nd Edition (Kindle Locations 605-607). Ludwig von Mises Institute. Kindle Edition.

So, if lower taxes leads to a greater supply of goods and services and an increase in wealth, why then wouldn’t the lower corporate tax rates under consideration lead to greater wealth?  As we will see, the definition of taxes must be clarified and expanded to understand the true nature and ultimate impact of any new tax proposal.  On the surface, the calculations seem rather elementary.  If, say, on every $1 million in profits, a corporation now pays 35%, or $350,000 in corporate income tax, and the tax is lowered to, say, 15%, and that same corporation only pays $150,000, there appears to be a windfall of $200,000.  But is that all there is to the story?  The truth of the matter is that corporations would not have any choice with regards to their revenues for, collectively, their gain in reduced expenses is another’s loss in income, which would ultimately be felt by those same corporations on their top line.

If the federal government continues to spend at the same rate, the $200,000 tax savings from our example above must still be paid.  Either current taxes from individuals must offset the $200,000, or the $200,000 must be borrowed from the public.  It doesn’t matter, one or the other, or a combination of both, corporate revenues will, must, decline by $200,000 as the consumers purchasing their products will have less to spend, as they will be spending it on current taxes or future taxes, debt, or federal government bonds.  There is no windfall, simply a rearrangement of the furniture.  But, won’t lower tax rates attract foreign capital, and increase corporate profits?

If the federal government, states and local as well, do not voluntarily reduce their burden to the economy, or if it is not forced upon them, any foreign capital attracted on the basis of lower taxes will be sorely disappointed.  Taxes are not just current tax obligations, taxes include all current spending, whether covered by current taxes or not.  Corporate taxes could be reduced to zero, but if total spending of resources towards government does not decline, total taxes (current taxes plus debt financing) stay the same.  The obligation, instead of being met at the corporate level, must be met elsewhere.  As a side note, depending on the circumstances a surplus of foreign capital might otherwise have positive impacts, but competition for existing resources would drive up prices and lower returns might stem the flow of capital prior to any real impacts being felt.  That leads us to another question; what if there is a decline in government spending to match the tax cut?

First, before we answer that question, the federal government increased their debt in the last fiscal year, ending September 30, 2016, by over $1 trillion (Source), and total debt outstanding is now pushing $20 trillion.  It would seem to me that a cut in government spending, and consideration of the legacy we leave future generations, is long past due.  Not only is it past due, it turns out that reducing government expenditures, not current taxes, corporate or otherwise, is the closest thing to nirvana we might experience here on earth, at least with regards to the federal government.  If we cut current taxes and spending in the same amount, human and natural resources could be re-deployed from unproductive or even counter productive governmental activities, to productive private sector projects.

If we cut government spending by $1 trillion, and balanced the budget (reduced current taxes proportionally) as a starting point, that $1 trillion could be redirected toward the private sector while the growing burden to future generations is retarded.  The producers of wealth in the private sector would have more of their own money to spend.  That would be a good thing.  Instead of compulsory spending on government “services” like regulations, research boondoggles and war implements, producers can buy more houses, furniture, cars, etc.  But, what about the federal government employees and contractors that would lose their jobs?  Won’t gains in the private sector be offset by losses in the federal government sector?

Mainstream economists in the U.S. feared, following World War II, that the economy would collapse when soldiers came home from Europe and Asia.  What would the factories produce if they were not churning out tanks, planes and munitions?  And, what would happen to the soldiers who lost their “job”, and their income?  How would they be able to consume without an income?  As it turns out, the post-war economy boomed.  The producers at home, who had to fund the federal government, including the entire war effort, were now free to spend their income on consumer goods.  The goods that were in little supply and in many cases rationed during the war were now available for purchase.  Factories, instead of turning out the fore-mentioned war supplies, could re-tool and turn their efforts toward consumer demands.  And, where would businesses get the employees to produce what was in demand?  The returning soldiers, of course.

Returning to today, initially, the windfall felt by the private sector economy in the form of lower federal government spending will be offset 100% by government employees and contractors who no longer have those resources.  They, the government workers and contractors who lose their jobs, however, would relatively quickly be absorbed in to the economy providing services voluntarily contracted for by the private producers, taxpayers and creditors, who were funding their positions in the federal bureaucracy.  These former government employees and contractors will, then, truly be public servants, and producers, in their own right.  As the former government employees are absorbed in to the private economy, the wealth of the people of the nation will grow.   This, reducing the size, scope and cost, of the federal government, is a win in my book.  What if the federal government ran a surplus?

Running a surplus, maintaining the current level of taxes, or reducing the current overall level of taxation, while lowering government expenditures, will have the same general overall impact.  The key take away is that by lowering the burden of government the private sector is not only free to spend more of its current production as it wishes, its incentive to produce more is enhanced.  The benefits, however, and most assuredly, would be distributed in a different manner.  As the federal government retired a portion of its debt with any surpluses, and reduced future debt service requirements, credit would be made available for private projects.  Current taxpayers would not feel any current relief, though the private economy will grow and, while impossible to predict the details in advance, the nation as a whole would still be better of investing and consuming its own production, than having it confiscated and spent by their representatives in Washington, D.C.  One last question; what of the fate of the corporations we first referenced?

So called “progressive” economic thought, Keynesianism in general, would have us believe that government is needed, in fact required or compelled, to step in and effectively grow the economy by expanding the role of government.  Since government produces no wealth, an increase in government must extract wealth from the productive private sector, or decrease overall wealth.  The illusion is that what appears to be government-generated growth is simply the mining, or at a minimum, redistribution of wealth from the private citizens that produce and pay for government to those in the government, or contractors, that consume that productive wealth.  As we have seen, simply a cut in overall current corporate taxes would accrue no net benefit to the corporations purported to benefit from such a cut.  A cut in federal government expenditures, on the other hand, especially a significant cut, would have the same re-distributive impact described above on corporations, as on individuals.

The wealth of those producing for the private sector would grow, while opportunities to extract wealth via the federal government would decline.  Those wealth extracting corporations, really their employees, currently contracting with the federal government, would be faced with re-tooling their offerings or seeking employment in the private sector.  The more people, time, money and natural resources we spend on final consumer goods, on food, clothing, housing, transportation, medicine, what have you, the more time we can spend with loved ones and enjoying life.  If the final goal of Buddhism is nirvana, surely, our final goal must be a smaller federal government and a “transcendent state”, “released from the effects” of its profligate expenditures.

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