Here’s What Happens When We Lower Corporate Tax Rates

Source: Thinkstock
Source: Thinkstock

Conventional thinking dictates that a reduction in the amount of taxes on an individual or organization frees up that capital to be used in other ways. For those leading the charge to lessen the tax burden on businesses, hopes have been that that money will be reinvested back into businesses, increasing hiring and creating more output, and therefore spending in the economy. Over the past several years, this is the very argument that has taken place at the highest levels of government.

The overarching concept is rather simple. Policymakers want businesses to hire more workers, and to get them to do so, there have been pushes for significant tax cuts. And in an economy that has been in desperate need of jobs, the argument has been fairly persuasive. In practice, however, it’s left a lot to be desired.

In fact, a recent study actually debunks the idea that reductions in corporate tax rates helps to create jobs. At least, that is the finding of both Alexander Ljungqvist and Michael Smolyansky, who published their study through the National Bureau of Economic Research. The two researchers’ findings say that while slashing corporate tax rates at the state level does not create additional employment opportunities, they also found that raising those same taxes can be damaging to local economies.

“Our results suggest that increases in corporate tax rates uniformly reduce employment and income while corporate tax cuts are ineffectual in boosting economic activity except when they are implemented during recessions,” the study concludes. “Tax cuts, on the other hand, are only effective in recessions, when they raise employment by around 0.6% and income from employment by around 1% for every percentage point cut in the tax rate.”

Interesting conclusions, no doubt, but there are some important details to keep in mind. Again, this is only at the state level, which limits the scope of the study. While the results shouldn’t be assumed to take place with federal tax levels, it does provide some interesting insight into localized tax rates.

Source:  Julie Denesha/Getty Images
Source: Julie Denesha/Getty Images

Given the findings of this study, and its limitations, what is it that American can actually learn? If anything, it’s that the reality behind fiddling with tax rates and the ultimate economic outcomes is more complicated than many would be willing to admit. For business leaders and conservatives, it’s a setback in that it does deflate a major argument for lower business taxes. For those who feel otherwise, the study itself does show that while cutting those taxes doesn’t deliver the jobs that are often promised, raising them actually does hurt.

With that said, are there any examples of what the study discusses playing out in the real world? Luckily, there are. You need to look no further than Kansas to see it playing out in real time.

Kansas governor Sam Brownback was notably elected in 2010 on an agenda that included massive tax cuts for businesses, and the slashing of state budgets. It was an attempt to lure new business and industry to Kansas, to supply the state’s residents with jobs. It ended up causing a $279 million budget shortfall, and stunting the entire state’s economy. The specifics included income tax exemptions for 191,000 Kansas businesses, and lowering the income tax rate for the top tier of individuals from 6.45% to 4.9%, and and will hit 3.9% by 2018, as Politico reports.

Partisan feelings aside, what Brownback did was essentially exactly what Ljungqvist and Smolyansky’s study investigated: He cut taxes on industry with promises of an economic trickle-down effect in the form of jobs. Just as the researcher’s findings might suggest, those never materialized. Instead, Kansas’ economy has suffered as a result, and in many ways the employment situation has been made worse as public employees have had to be fired due to budget shortfalls. Kansas job growth rate has also remained below the national average. Brownback was re-elected during the 2014 midterms, however, so we’ll get to see the effects of his policies in the long term as well.

Of course, there are other ways to implement tax changes at the state level. Just because Brownback’s ideas haven’t panned out thus far doesn’t mean that similar plans in different states would have the same results. But taking the recent study’s findings to heart, tax cuts for corporations — at the state level, anyway — is not the way to generate jobs.
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