“This new law will provide tax incentives for companies to expand and create jobs by investing in plant and equipment. ” proclaimed President George W. Bush signed the Job Creation and Worker Assistance Act in 2002. “This measure will mean more job opportunities for workers in all parts of our country.”
As Bush promised, the bill included substantial corporate tax cuts. Further corporate tax cuts would follow with the American Jobs Creation Act of 2004 and the Tax Cuts and Jobs Act of 2017. The rhetoric was the same in each case: allegedly, these tax cuts were not intended to enrich corporate governance, but to employ American workers – hence the word “jobs” in all three titles. These companies would take the extra money and put it in the workforce to create new and better opportunities for ordinary people.
That didn’t happen. In reality a new academic study Much of the recent corporate tax relief has only been related to higher wages for corporate executives. The paper, which is currently undergoing peer review prior to publication, is the first full academic examination of its kind. The author, Grinnell College Assistant Professor Eric Ohrn, used a database of the highest levels of compensation at US publicly traded companies to Analyze the impact of tax cuts on executive pay.
If Ohrn is right, corporate tax cuts over the past two decades will reward America’s corporate fees with hundreds of billions of dollars by 2030. Ohrn leads this extraordinary payday to the successful use of “looking for rent, “An economic concept that describes the use of power by individuals and companies to gain wealth without creating new value themselves.
Ohrn examined the remuneration of 31,879 executives at 2,794 public companies from 1998 to 2012. His results showed that for every dollar of reduced corporate taxes from two types of tax cuts, the remuneration for the top five executives of the companies increased by 15 to 19 cents.
While little data is available on lower executive pay, higher pay at the top will almost certainly lead to an increase in executive pay in the corporate rungs below. Dean Baker, senior economist at the Washington, DC Center for Economic and Policy Research, mention, that If the next 20 executives at each company in Ohrn’s study were to receive a total of half the increased salary of the top five executives, it would mean that “between 22% and 37% of the money from a tax break went to 25 of the highest-paid people in the corporate hierarchy. “
The amount of money at stake is gigantic.
American business has been waging a war on corporate taxation for decades. The reasons for cuts are always the same: companies and their preferred politicians say they have the opportunity to invest in new technology and equipment that would lead to better jobs and higher wages for workers. Unfortunately, thanks to arrogant corporate taxes, they simply cannot afford to do so.
None of the parts of this story are true. There is no recognizable connection between level of corporate profits and investments. Even if it did, it would likely make little difference to the average worker: higher productivity led to higher average wages for regular people in the three decades after World War II, but that link was broken in the 1970s. Productivity has risen steadily since then, but it has hardly shown up in ordinary people’s paychecks. Instead, greater wealth has gone to those at the top of the wage scale, such as B. Company executives.
However, the fact that the arguments for corporate tax cuts make no sense has not hurt their success. In the 1960s, the federal government took on an average of around 3.7 percent of the gross domestic product through corporation taxes. By the end of the 1990s it had fallen to 2.1 percent. Congressional budget office now Estimates that it will average 1.3 percent from 2021 to 2030 – that is 0.8 percentage points of GDP less than 20 years ago.
The fact that the arguments for corporate tax cuts make no sense has not detracted from their success.
The decline doesn’t seem like much at first, but the CBO predicts that total U.S. GDP will be $ 273 trillion over the next 10 years. If corporate income tax was still 2.1 percent of GDP in the late 1990s, it would bring in $ 5.73 trillion. At the current forecast rate of 1.3 percent, it will be $ 3.55 trillion. Businesses save $ 2.18 trillion.
The new study does not examine all changes in corporate taxation over the past 20 years. In particular, its analysis does not include the Tax Reduction and Employment Act of 2017. (Of the 0.8 percent decline in the corporate tax rate of GDP over the past 20 years, about half is due to the TCJA. and the rest is largely thanks to the 2002 and 2004 Bush administration bills.)
The paper, therefore, cannot be used to draw precise conclusions about how much of the coming $ 2.18 trillion in lost corporate taxes will go into the pockets of executives. In principle, however, the effects found in Ohrn’s study should apply.
“If companies were to react to the tax cuts in the TCJA in a similar way to the tax breaks I examined,” says Ohrn, “between 15 and 19 cents of every dollar would go to the company’s five top executives.”
“If companies responded to the tax cuts in the TCJA in a manner similar to the tax breaks I examined, between 15 and 19 cents of every dollar would go to the company’s top five executives.”
That’s between $ 327 billion and $ 414 billion. The numbers would be even higher if the compensation of lower-ranking executives were counted.
The study examines and submits any explanation beyond finding rent for executive pay increases. In theory, as Ohrn puts it, the additional payment could have been made “on the basis of a purely mechanical and non-discretionary process”. For example, corporate tax cuts can cause companies’ stock prices to rise, which would increase executive compensation that is contractually linked to a company’s stock price. But the newspaper finds that this is not the reason for the larger paychecks.
Nor is it the case that higher pay comes from the tax cuts that free up more money to hire top talent. That should have shown itself in more lucrative contracts for newly hired executives. It has not.
The only explanation this leaves is that corporate executives paid more money just because it was available and they had the power to grab it.
This in turn suggests something important about who is in power in American corporations. Of course, they are not regular employees. Interestingly enough, they are often not shareholders either.
After all, every billion dollars that executives capture through retirement is a dollar that, according to the theory of capitalism, belongs morally and legally to the owners of the company. However, as anyone with a 401 (k) knows, there is a great distance between capitalism in theory and practice: “owning” just a small part of a business doesn’t give you a voice or knowledge of how the business is run of what its management is doing.
However, Ohrn notes that for companies with strong governance structures – statutes that allow shareholders to more easily discipline executives, a single top investor holding a high percentage of shares, and executives with shorter tenures – tax cuts to none manager salaries lead to a significant difference.
But these cases are exceptional and inundated with companies that are instead run by a parent class. Because of this, as Ohrn notes, the average compensation paid to CEOs at S&P 500 companies increased fivefold between 1980 and 2010. Therefore, it is likely to rise even higher into the stratosphere.