Here's a question to ponder: If I own 1% of a public company and that company's taxes get cut by $1 million, did I just get 1% of that tax cut or $10,000? The simple answer is NO. I won't have even one dollar more. The company will, however, have an extra million dollars and could use that to invest in a new project, to pay higher wages, to pay off debt, or even to pay a dividend. If the dividend is chosen, I would get some of the tax cut; otherwise, I get nothing. The value of my stock might rise, but that value is more related to the amount the company is earning and its future prospects than the size of its tax payment.
That question and answer is rather obvious to those who understand how companies function and how the stock market works. Of course, in the stock market, nothing is perfect and nothing always works the way it is supposed to. Nevertheless, the idea that the shareholders of a public company are the direct and proportional beneficiaries of a tax cut is sheer nonsense, and that is not a complicated or even contested issue.
I'm writing about this, because Paul Krugman adopts exactly that assumption in the New York Times today. He cites the falsely named Tax Policy Center for the conclusion that a $2 trillion cut in business taxes will go 35% to foreigners because 35% of the stock in America's public companies is held by foreigners. He also announces that the tax cut won't help create jobs or raise wages because the connection between the tax cut and such behavior is just too tenuous. Krugman won a Nobel Prize in Economics for his work on international trade some years ago. As a columnist, however, Krugman seems to want to live in a fantasy world where facts don't matter and laws of economics can be ignored. That's a nice way of saying that Krugman's column is pure nonsense.
First, a tax cut for American businesses does not go directly to shareholders. That's why I started with my example. The tax cut might go in a small part to dividends, but that's the only thing the shareholders will get directly.
Second, there will be a major push for new investment by America's businesses after the tax cut. Before a company typically makes any investment, they analyze the expected outcome of that move. With a lower tax rate, the return on the investment is greatly improved, so more investments will get made. Investment by business is the greatest single source of new jobs and higher wages in the economy. Even Krugman would have to agree with that.
Third, as more businesses invest and more jobs are created, we will get to the point where American workers can share in the increased prosperity in the form of higher wages. During the Obama era, wages were stagnant. There was no meaningful increase. And, of course, Krugman thought that the Obama economic policies were just great. The proposed tax cuts will raise wages and incomes.
Fourth, the Tax Policy Center decided that since 35% of the shares of public companies in the USA are foreign owned, that 35% of the entire tax cut to business ought to be credited to them. Public companies, however, are not the only beneficiaries of the tax cuts. There a millions of small businesses and large businesses that do not have shares traded on any exchange. The Tax Policy Center decides to ignore these privately owned companies even though they make up close to half of the US economy. The Tax Policy Center uses clearly erroneous numbers to get it's 35% figure and Krugman just adopts this obviously faulty method. Their goal is not analysis, but rather to come up with the best argument against the tax cut no matter the actual facts.
Fifth, the terms of the tax cut proposal have not been finalized. The Tax Policy Center and Krugman both don't know what the proposal for business will be. Somehow, though, it doesn't matter to them. Not only do they use faulty logic, but they also just assume what they want about the content of the final bill. It's total BS.
Krugman should issue a retraction for his article.
That question and answer is rather obvious to those who understand how companies function and how the stock market works. Of course, in the stock market, nothing is perfect and nothing always works the way it is supposed to. Nevertheless, the idea that the shareholders of a public company are the direct and proportional beneficiaries of a tax cut is sheer nonsense, and that is not a complicated or even contested issue.
I'm writing about this, because Paul Krugman adopts exactly that assumption in the New York Times today. He cites the falsely named Tax Policy Center for the conclusion that a $2 trillion cut in business taxes will go 35% to foreigners because 35% of the stock in America's public companies is held by foreigners. He also announces that the tax cut won't help create jobs or raise wages because the connection between the tax cut and such behavior is just too tenuous. Krugman won a Nobel Prize in Economics for his work on international trade some years ago. As a columnist, however, Krugman seems to want to live in a fantasy world where facts don't matter and laws of economics can be ignored. That's a nice way of saying that Krugman's column is pure nonsense.
First, a tax cut for American businesses does not go directly to shareholders. That's why I started with my example. The tax cut might go in a small part to dividends, but that's the only thing the shareholders will get directly.
Second, there will be a major push for new investment by America's businesses after the tax cut. Before a company typically makes any investment, they analyze the expected outcome of that move. With a lower tax rate, the return on the investment is greatly improved, so more investments will get made. Investment by business is the greatest single source of new jobs and higher wages in the economy. Even Krugman would have to agree with that.
Third, as more businesses invest and more jobs are created, we will get to the point where American workers can share in the increased prosperity in the form of higher wages. During the Obama era, wages were stagnant. There was no meaningful increase. And, of course, Krugman thought that the Obama economic policies were just great. The proposed tax cuts will raise wages and incomes.
Fourth, the Tax Policy Center decided that since 35% of the shares of public companies in the USA are foreign owned, that 35% of the entire tax cut to business ought to be credited to them. Public companies, however, are not the only beneficiaries of the tax cuts. There a millions of small businesses and large businesses that do not have shares traded on any exchange. The Tax Policy Center decides to ignore these privately owned companies even though they make up close to half of the US economy. The Tax Policy Center uses clearly erroneous numbers to get it's 35% figure and Krugman just adopts this obviously faulty method. Their goal is not analysis, but rather to come up with the best argument against the tax cut no matter the actual facts.
Fifth, the terms of the tax cut proposal have not been finalized. The Tax Policy Center and Krugman both don't know what the proposal for business will be. Somehow, though, it doesn't matter to them. Not only do they use faulty logic, but they also just assume what they want about the content of the final bill. It's total BS.
Krugman should issue a retraction for his article.
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