It’s useful that not many of us look to the New York Times for illumination on matters economic — they never quite manage to get the lumens all lined up and pointing in the right direction. References to economic stories that appear there tend thus to be warnings about not believing them — perhaps for what they do say, often as not for what they don’t.
As is the case here, with two pieces trying to tell us that a tax cut for those big bad evil corporations would be a very bad idea.
On Aug. 29, Patricia Cohen managed to make some highly cogent points — that offshore money isn’t in fact offshore, it’s all flowing around the American economy — just in the name of the offshore subsidiaries, not the parent companies, for example. Yet we are also told that corporate tax cuts don’t lead to more investment, they just get paid out as dividends and stock buybacks.
Well, yes, and?
On Aug. 30, Sarah Anderson told us much the same, cutting taxes on repatriated profits doesn’t lead to more investment, it just all gets paid out to investors.
I believe the both of them. But I’m also pretty sure there’s something they’re missing here too.
It’s entirely true that extant large American corporations don’t really have many financing problems these days. They’re not overly reliant upon retained profits to finance expansion and they certainly don’t seem limited as to what they can invest in by not having more access to those retained profits. They’re cash-rich and it’s quite right to note they’re not investing much in new plants and so on. That they’re not doing a great deal with their piles of money is thus a reasonable observation to make.
It’s the next bit where the error comes in. Both authors just stop at the point that the last repatriation was paid out to investors and so therefore the next one will be. They’re probably right in that observation, by the way, but our question is still this: well, yes, and? Money doesn’t disappear when handed to investors, us blood sucking capitalists are rather more greedy than that.
No doubt there is some odd-ball out there maintaining a vault of cash to swim in, a la Scrooge McDuck, but that’s not anything like the average experience. Take this observation from Matt Levine, which is that the modern American stock market is more a place to return money to investors rather than a place to get it from them. All those stories of listed companies paying out 80 percent, or in the wilder ones 120 percent, of profits in dividends and stock buybacks are in fact true. But then if that’s what is meant to be happening, that’s just fine.
We live in a world where we don’t particularly like conglomerates. We much prefer, on the grounds that hard-earned knowledge about economic efficiency makes us do so, to have single-line companies who stick to their last. We also recognize, at least we should, that large companies generally employ less labor over time and they’re also not where the bulk of either economic growth nor technical change come from. That’s all in the small company sector, which provides more than all job growth, most economic growth, and at least the healthy majority of technological advance.
It’s almost as if we’d like to have some method of moving that large corporate cash surplus over into that small company sector. Which, actually, we do. They’re called investors.
That is, the sending of cash out of the corporates to investors isn’t some aberration. It’s the point. Money doesn’t disappear when the investors get it. After that healthy chunk taken by government (say, 15-20 percent in either dividend or capital gains tax), then there’re only two things they can do with it: They can save it or they can spend it. If they spend it, that’s demand in the economy, and as Nick Hanauer keeps pointing out, it’s demand which calls forth the investment. If they save it, bar that one reliving the older “Duck Dynasty” tales, the money of the rich is, by definition, more investment, isn’t it? Even if they just park it in a bank, it gets lent out — that being what banks do with money — so that someone else is either spending or investing it.
The joy of this is that if you really do believe the large corporations are sitting on very large piles of cash that they’re not doing anything with, you should indeed be supporting a tax holiday on those repatriated profits. Not because they’ll invest it domestically, but precisely because they’ll not. They’ll pay it out to shareholders who will then invest or not, but still recirculate that money through the U.S. economy. In fact, the more you think the corporates aren’t doing anything with it, the more you should be supporting the tax vacation.
Oddly, that’s not how the argument plays out, of course. For some people really do seem to think that money paid to stockholders — that money which is the very reason investors put their cash into companies in the first place — disappears when it is paid out.
Or, of course, too many people are getting their economics from the New York Times, where the illumination of the subject is of dimly low wattage.
Tim Worstall (@worstall) is a contributor to the Washington Examiner’s Beltway Confidential blog. He is a senior fellow at the Adam Smith Institute.
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