Monday, February 19, 2018

Curing Our Macroeconomic Ills: Raising Corporate Taxes

There are many reasons to be concerned about the wisdom of enacting the recent tax bill placed into law by the Republican majorities in the Senate and House.  This bill increases fiscal deficits, provides most of the tax relief to the wealthiest citizens who need it the least, and provides more profits to corporations who are already awash in more funds than they know what to do with.  It is the lack of wisdom related to lowering corporate taxes that is addressed in two papers provided by the Washington Center for Equitable Growth

The issue being addressed is the inapplicability of standard economic analysis to our current economy.  Traditional thinking assumes that consumption will lead to company profit which will be reinvested in greater production capability which, in turn, will provide increased wages and jobs leading—in a virtuous cycle—to even greater profits.  The evidence that this virtuous cycle is not operative has been obvious for many years as economic growth is low, wages are stagnant, and corporate investment in capital is falling.  The only thing that seems to be rising are corporate profits.

A detailed analysis is provided in Kaldor and Piketty’s facts: The rise of monopoly power in the United States by Gauti Eggertsson, Jacob A. Robbins, and Ella Getz Wold.  A short summary of the study’s findings is presented in How the rise of market power in the United States may explain some macroeconomic puzzles by Jacob Robbins.  We will utilize this latter article.

Robbins states that several things have been occurring over recent decades that are inconsistent with the assumption of an efficient marketplace.  Included are the facts that the financial values of companies have become much greater than the value of their assets, yet these companies have used their increased wealth, as driven by increased profits, not to invest in assets for greater production, but to diminish labor and other costs in order to maximize profits.  These are classic signs of companies that are not threatened by competition, but rather, are securely in control of their markets.  In other words, they have some degree of monopolistic power.

“….Gauti Eggertsson, Ella Getz Wold, and I at Brown University argue that these diverse trends are closely connected, and that the driving force behind them is an increase in monopoly power together with a decline in interest rates.”

“Here’s how it works: An increase in firms’ market power leads to an increase in monopoly rents-economic parlance for profits in excess of competitive market conditions-and thus an increase in the market value of stocks (which hold the rights to these rents). This leads to an increase in financial wealth and to what’s known as Tobin’s Q, the ratio of a firm’s financial value (market capitalization) to the value of its assets (book value).”

Robbins provides the following plots of US financial wealth and capital value divided by GDP over time.

Clearly a transformation in the macroeconomic character of the economy began in the 1980s.  Companies began investing less of their income in capital and wages and keeping more of it in profit.  What does Robbins believe is an appropriate response to this situation?

“Greater monopoly power tends to depress economic growth and increase income and wealth inequality. With high levels of monopoly profits, it may be optimal to have higher taxes on corporate income than would be suggested by analyses that assume perfect market competition.”

In other words, if the economy is suffering low growth because companies see no need to invest profits in greater production capability and higher wages, then the government must consider extracting those unused profits via higher corporate taxes and plan to use those funds for projects that do create jobs and assets.

This analysis seems right on target.  Yet, we have just done just the opposite.  Lowering corporate taxes allows for greater company profit with no increase in investment, and the increase in wealth will allow companies to gain even greater control of their markets.  Company profits have been increasing for many years while the share of income devoted to wages has been falling.  The supposed “trickling down” has not occurred in the past, nor will it in the future.

It seems that when intelligent people gather to choose leaders they tend to choose the most intelligent and knowledgeable among them.  However, when corrupt people gather together, they seem to prefer the most corrupt among them as leaders.

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