The economist axiom is you if tax something, you get less of it. This is the argument behind so called “sin” taxes on items such as cigarettes and alcohol.

This being the case, why do politicians continually rail about jobs leaving the US (or going to ATMs? Yup should have subsided the stagecoach and kept it around too) when corporations are continually taxed more for having employees?

Have a look below at how the makeup of corporate taxes has changed over the years from Political Calculations:

If you want to see less outsourcing, then your policy should be to reduce payroll taxes, which are costs of having employees. When I have worked on labor reduction efforts at a few different companies, we always add 35%-40% to the affected employees’ salaries to account for taxes and benefits for the saving calculation. It is exceptionally expensive to employ Americans.  So the questions is, what behavior do you want your policy to drive? As economist Mark Perry has written: “Build it and they will come; tax it and they will leave.”

Comments

  • Stephen Meehan

    Actually the economist axiom depends on elasticity. If it is highly inelastic (e.g. oil) you can tax the hell out of it and see very little change in demand. That is why sin taxes tend to fail miserably (full disclosure, I usually think they are a good idea) at a making people stop doing anything. Because “sins” if you will are not an economic decision — they’re very inelastic. But what they do do is run to somewhere where they aren’t taxed quite as heavily (i.e. buy your cigarettes in Jersey when you live in NY)
    The demand for labor from corporations tends to be inelastic, especially in the high skill and service markets. There is really a way to outsource the guy who works a Wendy’s and it’s tough to effectively outsource your corporate tax lawyer — so corporations will continue to pay for those things. Your argument is quite effective against something like manufacturing jobs (i.e. when your line workers are too expensive in Alabama, pay them in Indonesia), which are largely gone anyway.
    Instead, you get less people being asked to do more work — that’s efficiency. Corporations love it, unemployment rates do not. My fear is that during the recession, CEOs become so accustomed to efficiency, flipping the corporate tax structure on its head wouldn’t help — it would just piss everyone off.

    • http://scottslant.blogspot.com/ Scott A. Robinson

      I stand by you get less of what you tax. However, the degree to how much less you get depends on elasticity.

    • Alaina

      I agree with your point on elasticity, but I don’t completely agree with your point on labor and corporate income.

      You can’t outsource the guy that takes your order of the gy that makes your fries, but you can outcource a lot of the corporate level functions, and many firms are doing so. Outsourcing is solely related to manufacturing. I’m a management consultant for asset management firms and they they are increasingly outsourcing middle and back office functions.

      Of course corporations love to have less people doing the same amount of work, but they aren’t happy about corporate tax rates. The labor situation may increase profits, but the corporate tax rates decrease profit.

      Corporations are always looking for ways to cut costs, but they don’t generally go through and enterprise wide cost reduction exercise until they start to get squeezed or foresee getting squeezed. They vote with their feet just like we do and I think we’d see nice growth if we cut the corporate tax rate to a more palatable level (in combination with eliminating over regulation).

      • Stephen Meehan

        Actually, at the end of the day, I agree that corporate tax rates in the US are too high and I think we should tax mostly based on revenue at the federal level (not payroll). (Totally unrelated I think we should tax on sales at the state/local level)
        I’ll grant you that middle office functions are being outsourced. But I don’t think corporate tax rates are related to that per se, with zero payroll tax, American labor is considerably more expensive than the most popular international labor markets (China, India, Phillipines, Russia). Also, I whole-heartedly disagree with you that a tax cut would spur growth at any significant level in the near term — the effect of that is much more long term. I think the lack of growth is largely a function of credit availability, which corporate tax changes won’t effect very much.

        • Alaina

          Although American is labor is expensive, I think we could retain jobs (obviously not all, but a decent portion) if taxes were at the right level.

          However, in our current environment, I agree that just lowering the tax rates won’t do much. It has to be a combination of taxes, deregulation and business having a sense of certainty in the market. 4 years ago would have been a different story, but today’s business climate is out of control.