Why a corporate tax reduction will not translate into more jobs and only makes corporations richer at the expense of the public debt.

The Republican lead congress just passed a tax reform bill that reduces the federal corporate tax rate from 35% to 20%. This means that companies in the US would only have to pay 20% of their profits as tax instead of the current 35%. This is a drop in their tax payment of 15% which represent a 43% reduction in their tax burden.

Meanwhile, the tax bill has a very modest if any middle-class tax cut. Those that itemize their deductions may see an increase in their taxes since deductions such as state income tax paid have been removed.

The argument from the Republicans for the corporate tax reduction is that if companies have more money, they will use that money to create jobs in the US. I want to explain to you why this is not the case. First you need to understand who actually pays corporate tax. Corporate tax is only paid by corporations in the US that show a profit and this profit is taxed at the corporate rate which becomes their corporate tax. Most corporations and small businesses in the US who create the majority of US jobs actually do not pay corporate tax at all. I want to give you an example of four companies to illustrate this.

The first company is a small business that is a family owned ice-cream shop. Typically this type of business is an LLC (limited liability company) or an S corporation. LLCs and S corporations do not pay any corporate tax since any profit in them goes directly as income to their owners. So the owners of LLCs and S Corps pay income tax on the profits in these companies and are not subject to corporate tax and therefore will see absolutely no benefit from a corporate tax reduction.

The second company is a large medical practice that employs 100 employees. This company is a regular C corporation who’s profit is subject to corporate tax. But the issue here is that this company, like so many other small businesses in the US, do not show a profit at the end of the year. They will take any surplus money they have at the end of the year and give it as a bonus to the owners (typically the physicians in the practice) so that the corporation does not show a profit so they can avoid paying corporate tax. This process commonly referred to as “zeroing-out” the corporation is commonly performed by most small businesses and is perfectly legal. So since these companies are not paying a corporate tax, they will see no benefit from a reduction in the corporate tax rate.

The third company is Tesla motors. Tesla is a large innovative company that is growing it’s electric car business in the US has created and will continue to create US jobs. Innovative companies like Tesla are essential to job growth in the US and for this reason we should do what we can to help job creating companies like Tesla. But Tesla, has not paid and probably will not pay any corporate tax for quite some time. This is because Telsa does not have a profit in its business. Telsa loses money every quarter. Their money comes from their investors who are OK investing in a fast growing company even though it loses money because they feel that sometime in the future, it will be profitable. Since corporate taxes are only paid by corporation that make a profit, Tesla will not see any immediate benefit from a corporate tax rate cut and therefore will not be helped in any way in creating jobs. In 2016 Tesla lost $773 million. If in 2017 Tesla shows a profit of $500 million (they won’t since they are not showing a profit yet this year) they will not have to pay any corporate tax on the $500 million since they can use the loss from the year before to cancel this out. So even a large company like Telsa that is growing it’s business and hiring more workers will see no benefit from a corporate tax rate cut and therefore will not be able to hire more workers because of it.

At this point, you may be wondering who will benefit from a corporate tax rate cut which brings me to the fourth company. Apple Inc. is the largest company in the world. They generate a lot of profit every quarter from mostly iPhone sales. In 2016 they had a profit of $84 billion. The US portion of this is subject to corporate tax at the current rate of 35%. If the tax bill enacted by the congress goes into effect, then Apple will only have to pay 20%. The Republicans’ idea that this extra money that Apple gets will be reinvested into US jobs is a farce. The fact is that Apple just like most companies that already show a profit have cash on hand. In fact Apple has over $230 billon of cash that they already don’t really know what to do with. Giving them extra money in the form of reduced taxes to add to this cash horde is not going to create jobs because Apple does not have a project or product to add jobs to. If they did, they would already be spending part of their $230 billion they already have to do this. They don’t need the extra money. So what will Apple do with the extra money? Typically they will give this money to their executives as bonuses or to their shareholders in the form of increased dividends or stock buybacks which will be a benefit to their shareholders. Since the wealthy have a disproportionally high ownership of Apple stock compared to the middle class or poor, the wealthy will see this benefit, not the poor.

For these reasons, this corporate tax break in the guise of some type of middle class benefit by increasing jobs is a complete farce. It will only make already profitable corporations and the wealthy even more wealthy. To add insult to injury, the new tax bill is estimated to raise the national debt by $1.5 trillion. So the public debt, debt owed by average citizens is going to increase in order for corporations and the wealthy to get more wealthy.

Don’t have the wool pulled over your eyes. Tell your congressmen and senators you want a real middle class tax cut and not corporate welfare.

Please share this article with your friends to help spread the word and educate them on how corporate tax cuts work.