posted July 23, 2011
Krugman at the Economic Rubicon

In his July 4 editorial New York Times in-house economist, Paul Krugman, identifies two important facts about jobs and taxes in the U.S. The first is that big corporations are sitting on a record hoard of cash and refusing to use it to invest in the US to create jobs. The second is that the ‘biggest of the big’, the multinational corporations, are sitting on the largest tranche of that corporate cash hoard, demanding even more tax cuts while they continue to shift jobs offshore.

U.S. multinational corporations’ lobbyists the past year have been engaged in a priority effort to lobby Congress and the Obama administration to dramatically reduce their corporate tax rate as a precondition for them bringing back some of their offshore cash—which they have been refusing to do at the current 35% corporate tax rate. They want a much lower corporate tax rate, they threaten, or they’ll just keep the money offshore.

Krugman correctly points out this is not the first time this kind of blackmail and shakedown of the public purse has occurred. It happened before, in 2004. The multinationals got away with it then, creating the incentive to do it once again today.

But Krugman ought to have put some flesh on his skeletal argument exposing the multinationals’ current repeat today of their 2004 tax cut maneuvers. How much are the big corporations’ hoarding today? How much are the big U.S. multinationals refusing to repatriate to the US and pay taxes on?

In 2004-05 the Bush administration pushed through big corporate tax cuts in a bill misleadingly called ‘The American Jobs Creation Act of 2004’, after having passed three packages of cuts in personal income taxes for wealthy investors in 2001, 2002, and 2003 (which were all similarly mislabled ‘job creation acts’). The two sets of tax cuts—Bush’s 2001-03 personal tax cuts and the 2004 corporate tax cut—are linked. Most of the former personal tax cuts were concentrated in capital gains, dividends, inheritance and the like. Capital gains and dividends between 2001-03 were cut to 15%, down from a rate of 77% in the 1960s, a decade which witnessed one of the fasted job creation rates in the U.S. But in order for wealthy investors and households to realize the full benefit of the 2001-03 personal tax cuts, it was necessary to cut corporate taxes in 2004 as well. That would ensure that more corporate cash would be available to pass through to investors in the form of capital gains and dividends. Both were necessary then, as they are again today, if the wealthy were to maximize their tax windfalls.

Three major business lobbying groups drove the 2004 corporate tax cuts. Leading the charge for the multinationals was the ‘Coalition for Fair International Taxation’, led by General Electric Corp.—whose CEO, Jeff Immelt, now heads up the Obama administration’s efforts to curry favor with the multinationals’ crowd. Multinational corporations’ lobbyists succeeded in getting Congress to lower the corporate foreign profits tax rate from the normal 35% to only 5.25%. The tax cut was sold with the argument that if the rate was lowered to 5.25%, the multinationals’ would bring the money back and invest in job creation in the U.S. As Krugman points out, they brought it back, but then used the money for stock buybacks (driving up the value of their stock and rewarding investors with sweet capital gains for which they now paid only 15%) as well as for dividends payout increases (which resulted in similar windfall for investors). The rest that was repatriated was used for buying up competitors through mergers and acquisitions, which usually resulted in corporate consolidations and lost jobs, not new jobs created.

Krugman’s pointing out of this scam that happened, and is about to happen again, is commendable. But he should have put some flesh on these corporate offshore tax avoidance bones. And explain in more detail why those cuts didn’t lead to jobs. So here’s the flesh for those bones.

Back in 2004-05, the amount of cash hoarded offshore by the multinationals was estimated by the investment bank, J.P. Morgan, at about $650 billion. About half that was brought back at the 5.25% rate in early 2005 and ‘invested’ in stock buybacks, dividend payouts, and mergers and acquisitions. The business press at the time even reported the company by company details for a couple months, identifying how much per company was being repatriated and spent on stock buybacks and dividends. That reporting quickly disappeared in the press as it became apparent what was happening. The immediate tax windfall for the corporations was $193 billion, with another $50 billion per year as long as the 5.25% provisions continued.

In his July 4 editorial Krugman should have also provided data to show how much is at stake today as this corporate scheme is about to be repeated. Big business in general is sitting on a cash hoard of about $2 trillion and multinationals’ are hoarding between $1 and $1.4 trillion offshore. The latter even admit to $1 trillion, so it’s undoubtedly somewhat higher. These are the big multinational corporations who blew right past the recent recession hardly experiencing an impact. The stock value of the S&P 500 companies, of which the big US multinationals are the largest segment, rose from $6 trillion to $12.3 trillion between 2007 and 2011. That’s a lot of capital gains income passing through at a mere 15% tax rate to wealthy investors!

Krugman correctly also argues growing corporate calls for more tax cuts has little to do with jobs. To quote him, “claims that a corporate tax holiday would create jobs…are nonsense?. Why corporations would finally begin to create jobs if we gave them still more trillions in tax cuts, when they haven’t done so with their current $2 trillion hoard of cash on hand, is today an argument in illogic totally contradicted by historical facts. But why not report the numbers, and then show there has been a total lack of correlation for more than a decade now between corporate-investor tax cuts and job creation?
Krugman should have put some flesh on the bones of his ‘no tax cuts-jobs link’ argument. What was the job creation record of the past investor and corporate tax cuts under Bush between 2001-2004? The facts are it took 46 months after the tax cuts began in 2001 just to get back to the level of jobs in the US that existed before the cuts began. That’s roughly the end of 2004. And what happened once the multinationals’ corporate tax rate was reduced from 35% to 5.25% in 2005? As his own paper, the New York Times, recently reported, multinational corporations over the past decade reduced the number of jobs in the U.S. by 2.9 million, as they hired 2.4 million offshore. Most of the jobs created after 2004 were in housing, commercial property construction, and finance—which had little to do with the multinationals’ sweet deal reducing their tax rate from 35% to 5.25%.

Yet another ‘proof’ there is no linkage between business tax cuts and job creation is the recent extension of the Bush tax cuts by the Obama administration last December 2010. Since then, job creation has progressively deteriorated. The private sector has created only about 75,000 jobs a month on average since the June 2009 low point of the recession. That’s about half of new entrants into the labor force. US Department of Labor data show that only a net 14,000 full time jobs were created from December 2010 through May of this year. The extension of those Bush cuts cost the U.S. Treasury $270 billion this year, producing only 14,000 full time jobs? Now the multinationals want another multi-billion dollar handout! Meanwhile, the Obama administration is about to cut businesses’ payroll taxes, and has all but agreed with Republicans to cut all corporations’ tax rates as part of a comprehensive revision of the US tax code that’s coming next year.

Krugman concludes his July 4 editorial with the statement “What our economy needs is direct job creation by the government?—a proposal this writer has been declaring as necessary for any hope of economic recovery for the past two years. But what does Krugman mean exactly by that ‘direct job creation by the government’? That is the key question. And it’s time he spells it out.

Liberal economists like Krugman have been moving reluctantly and slowly toward this inevitable conclusion slowly over the past two years, as it has become increasing apparent there is no sustained recovery in the US economy happening as a result of failed Obama administration economic policies of the past two years. Krugman and fellow liberal economists like Robert Reich, George Stiglitz and others who know better, see what has happened the past two years as well as what is coming—a possible ‘double dip’ and a debacle for Obama and the Democrats in the 2012 elections. But Krugman and friends still refuse to cross the economic Rubicon and boldly define and explain in detail what is necessary for recovery, or what they mean specifically by direct government job creation.

To his credit, Krugman at least has now arrived at the bridge even though he still lingers on the other side of the river. Time to cross it, Paul, and explain in detail the direct government job creation programs that are necessary if further economic catastrophe is to be avoided.

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