Best columns: Business
Issue of the week: Will a ‘tax holiday’ create jobs?
President-elect Donald Trump’s proposed “tax holiday” for American companies is supposed to be all about creating jobs. “But corporate boards and executives may have different ideas,” said Leslie Picker in The New York Times. U.S. firms have stashed some $2 trillion overseas from profits they’ve earned abroad; they’ve kept this money outside the U.S. in order to avoid paying up to 35 percent in corporate taxes. Under Trump’s plan, companies will be given the opportunity to repatriate such profits at a onetime rate of 10 percent. “If they were to bring that capital back, those companies could use it to invest in their businesses, which may in turn create jobs.” But that’s not the only option. Indeed, many analysts think it’s more likely that companies will use the money to pay down debt or reward shareholders by buying back their own stock. Companies may also devote the money to acquiring rival firms. That would be excellent news for investment bankers. “It would be less so for American workers who might get laid off as a result of cost cuts derived from combining two companies.”
It’s no surprise the prospect of a tax holiday has investors giddy, said John Cassidy in NewYorker.com. “For everyone else, a large dose of skepticism is in order.” Trump’s proposal “was put to the test, not very long ago, and it failed.” The Bush administration introduced a similar tax holiday in 2004. Instead of creating jobs, businesses poured money into stock buybacks and generous executive pay packages. Goldman Sachs is already predictingthat as much as three-quarters of the money that companies bring back will be spent on buying stock, instead of investments in new hires, equipment, or technology. The Bush tax holiday may even have destroyed jobs, said Matthew Rozsa in Salon.com. In 2011, a Senate investigation found that “the 15 companies that most profited from it actually cut almost 21,000 jobs between 2004 and 2007.” The bottom line is this: “Repatriation didn’t work in 2004, and it won’t work in 2017.”
“Well, it really does depend upon what our definition of ‘works’ is, doesn’t it?” said Tim Worstall in Forbes.com. It doesn’t matter if the companies bringing home overseas cash reinvest the profits in their own company or dole it out to shareholders. Money doesn’t simply vanish. If it goes to investors, they can spend that money or invest it elsewhere. Either way, it grows the economy. There’s no reason to think Trump’s plan won’t have a similar positive effect. But these one-off tax breaks don’t solve our longer-term problem, said Jeffrey Goldfarb in Reuters.com. Occasional tax holidays ultimately create “perverse incentives to move income overseas and wait for another amnesty.” It’d be much better to permanently reform the corporate tax code by switching, for example, to the kind of territorial system favored by most other countries. If that were to happen, firms would only pay U.S. tax on income earned in the U.S. Then all this “cross-border sleight of hand” would hopefully become a thing of the past.
The economy’s geographic divide
The U.S. economy looks very different depending on where in the country you’re standing, said Annie Lowrey. While the nation’s biggest cities are booming, much of the rest of the U.S. has all but missed the recovery. In rural areas, the employment rate in mid-2016 was actually 2.9 percent lower than it was in early 2007, before the recession started. In metropolitan areas, by contrast, employment was 4.8 percent higher than in 2007, and businesses there currently are adding jobs twice as fast as they are in rural areas. The national economy, which looks exceptionally healthy when viewed through aggregate, big-picture numbers, appears to be increasingly reliant on ahandful of “super-performing” counties, most of them in and around Los Angeles, Miami, and New York City. In fact, “just 20 counties, out of more than 3,000 nationwide, accounted for half of the net increase in new businesses between 2010 and 2014.” This divide may explain why so many voters chose to rebel against the Democratic Party, despite the economy’s overall strong performance. While the counties Clinton won accounted for two-thirds of the nation’s economic output, Trump’s accounted for just a third. “Just as income inequality has become a fixture in many Americans’ understanding of the economy, so too must geographic inequality.”
Protectionism’s misguided nostalgia
George Will The Washington Post
Trade protectionists want “to make America great again by making it 1953 again,” said George Will. That’s when manufacturing’s share of the labor force peaked at 30 percent. But the decline in factory jobs that followed “was not caused by imports from today’s designated villain, China, which was then a peasant society.” In reality, it was the return of competition from industrial nations devastated by World War II, combined with rapid technological advances. The latter trend continues today. Of the 5.6 million manufacturing jobs lost in the 2000s, trade accounted for only 13 percent; productivity improvements from new tech accounted for more than 85 percent. Effortsto protect workers by pricing imports out of the market through tariffs also tend to backfire, often by dramatically raising prices for consumers. In the 1980s, Ronald Reagan’s limits on Japanese auto imports helped create 44,000 U.S. jobs, but “the cost to consumers was $8.5 billion in higher prices, or $193,000 per job, six times the average annual pay of a U.S. autoworker.” Similarly, President Obama’s tariffs on Chinese tires saved 1,000 Americans’ jobs, but at a cost of $900,000 per job, “paid by American purchasers of vehicles and tires.” We’ve tried these interventions before. But for protectionism’s fans, “there is no Everest of evidence too large to be ignored.”