According to an article in the New York Times, it's a "myth" that corporate tax cuts mean more jobs. That's rather strange. Indeed, it goes against the commonly accepted view in economics. Most likely, the Times no longer subscribes to established economics because it's racist or sexist or something like that.
Let's review some basic ideas. First, the single biggest driver of sustained economic growth is business investment. Each dollar invested produces more than a dollar of growth because there is a multiplier on the spending. In other words, if a company builds a new plant, all of the vendors and workers who get paid for the construction in turn spend that payment and then they spend or invest that money which causes others to have cash to spend, and so on. A dollar spent on government investment also has a multiplier, but since it uses tax money, it takes that dollar away from people and businesses first. As a result, the growth it produces is much less than private investment. Consumer spending also produces a multiplier, but it is a one-time effect. In other words, a new plant built by a business will produce additional goods for many years, while a consumer buying new clothes only happens one time. There's a clear theoretical explanation for these effects in economics, but to put it simplistically, the best way to increase economic growth is through business investments.
Second, higher economic growth means a growing demand for labor. If a business sells 20% more shoes after it builds a new addition to its shoe factory, there have to be workers to run the machines that make those additional shoes. There can be some of the additional production that needs no additional workers because of higher productivity, but on the whole, the additional growth means more workers are needed.
Those two facts mean that anything that increases business investment will produce higher growth rates in the economy and that will mean more jobs.
So, does a lower corporate tax rate mean more investment by business? The clear answer is a resounding YES! If taxes are lower, then the net profits kept by the business on a new investment are higher. For example, if a new plant produces a $100,000 profit before taxes, the business keeps $65,000 when taxes are 35%, but it keeps $80,000 when taxes are 20%. The higher the projected profits from an investment, the more likely it is to go ahead. So, lower taxes mean more investment.
This is not hard to understand. It is not controversial. It is just standard economics. So why is the New York Times choosing to ignore it?
Let's review some basic ideas. First, the single biggest driver of sustained economic growth is business investment. Each dollar invested produces more than a dollar of growth because there is a multiplier on the spending. In other words, if a company builds a new plant, all of the vendors and workers who get paid for the construction in turn spend that payment and then they spend or invest that money which causes others to have cash to spend, and so on. A dollar spent on government investment also has a multiplier, but since it uses tax money, it takes that dollar away from people and businesses first. As a result, the growth it produces is much less than private investment. Consumer spending also produces a multiplier, but it is a one-time effect. In other words, a new plant built by a business will produce additional goods for many years, while a consumer buying new clothes only happens one time. There's a clear theoretical explanation for these effects in economics, but to put it simplistically, the best way to increase economic growth is through business investments.
Second, higher economic growth means a growing demand for labor. If a business sells 20% more shoes after it builds a new addition to its shoe factory, there have to be workers to run the machines that make those additional shoes. There can be some of the additional production that needs no additional workers because of higher productivity, but on the whole, the additional growth means more workers are needed.
Those two facts mean that anything that increases business investment will produce higher growth rates in the economy and that will mean more jobs.
So, does a lower corporate tax rate mean more investment by business? The clear answer is a resounding YES! If taxes are lower, then the net profits kept by the business on a new investment are higher. For example, if a new plant produces a $100,000 profit before taxes, the business keeps $65,000 when taxes are 35%, but it keeps $80,000 when taxes are 20%. The higher the projected profits from an investment, the more likely it is to go ahead. So, lower taxes mean more investment.
This is not hard to understand. It is not controversial. It is just standard economics. So why is the New York Times choosing to ignore it?
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