Probably the biggest news for this week is the anticipated vote on Tax Reform that the House has already passed and the Senate is currently considering. Restructuring taxes is something that is probably supported by most Americans, assuming the outcome for every American is the same -- that our particular tax bill will be lower than it has been.
Obviously reducing everyone's tax bill is not possible. While some people's tax bills will definitely go down, others will undoubtedly go up, but not necessarily in ways that will be obvious to everyone. For example, eliminating the deduction for home mortgage interest while raising the "standard" deduction may look like a wash but the only way to be certain is by comparing your particular situation from last year with what the potential outcome will be with the change. That is difficult to do since the information on the bill that has been released so far does not contain specifics that one can apply to an individual situation. In short, we probably won't know the benefits (or harm) until the measure is passed into law. That's not very comforting. One has to wonder why the Senate would operate under such conditions.
The other portion of the proposed Tax Reform bill is for corporations. The current tax rate in the United States on corporation is 35%, which is the third highest in the developed world. And business owners have fought against this every way they can, as one would expect. Tax incentives abound for corporations and those savvier CEOs take advantage of every one they can. With the proposed reforms, the tax burden of these companies would go from 35% down to 20%. While that won't make America's tax rate for corporations the lowest in the world (Ireland and Great Britain, for example, are both lower than 20%), it would make this country more favorable to doing business here, and, the argument goes, increase the ability of all companies here to offer more and higher paying jobs, expand their operations in America and increase needed research and development.
All of these are good arguments and points that most Americans can support. The problem is, they just aren't factual. This last August The Institute for Policy Studies released their 24th annual report on Corporations and those corporations' current role in the tax paying drama. The study looked at 92 publicly held American companies that a) reported profits every year from 2008 through 2015, and b) paid less than 20% in federal income taxes (less than the corporate tax rate proposed by the House and Senate Tax Reform bills). Their findings don't give weight to the argument that cutting taxes increases job growth, expansion or research.
The median job growth between 2008 and 2016 of these companies was a negative 1 percent. Among US companies as a whole in that same period the growth was 6%. While 6% is not a large number, at least it's a positive. For these studied companies, there was an overall job loss.
48 of these 92 companies (52%) eliminated a total of 483,000 jobs during this time period. That hardly suggests job growth. If these companies are paying less than the proposed new tax rate, why did they cut jobs? Remember these companies posted profits EVERY YEAR. Where is the job creation? What did they do with those profits?
The average pay for the CEO of these companies increased to $13.4 million. That's an 18% increase. That compares to a 13% increase for CEOs in the S&P 500 and 4% in the private sector. And for the CEOs of those 48 companies that slashed jobs, they enjoyed a pay of $14.9 million on average.
But those increases are worth it if these companies are expanding and doing research (since we know they are not using their profits to increase their workforce). But, that doesn't appear to be the case. In fact, the top ten companies that cut jobs also spent $45 billion EACH buying back their own stock. Which is money well spent if your goal is to make it appear that your stock is worth more than it actually is but does nothing to add to the job market.
Then what can be done for tax reform? For corporations, tax reform does not appear to be necessary. Looking at the information above, 92 companies made profits every year for the past decade yet paid less than 20% in taxes. They are already paying below the level that the Senate is proposing, so unless the tax incentives remain, these corporations will wind up paying more than they have in the past. Given the current political climate in Washington, I highly doubt that this is the intended outcome.
Instead of rewriting the tax code, I would suggest passing two simple pieces of legislation. The first is very simple; no publicly traded corporation in America is allowed to buy back its own stock. This would eliminate the possibility of a company artificially inflating its stock price and in the example above, would have provided $450 billion for job creation, expansion and research.
The second piece of legislation would change who can take advantage of tax cuts. Put simply to qualify for any tax breaks a company cannot pay its highest paid employee more than eight times what it pays its lowest paid employee. "Pay" would include all forms of compensation, including benefits, stock options, etc. If, for example, a corporation pays a receptionist $20,000 annually, and values that employees benefits package at an additional $20,000, the total compensation for this position would be $40,000. That would allow the corporation to pay its CEO $320,000 in total compensation. If the benefits equal the salary, then the CEO would be paid $160,000 annually. That's a far cry from the $13.4 million that the CEOs of the 92 companies above are paid (on average) and much less than the $14.9 of the 48 CEOs who cut nearly half a million jobs. But look what this legislation would do for our workforce. If the CEO wants to keep earning $14.9 million (assuming this is total compensation), then the receptionist must be paid nearly $1.9 million. This is probably not going to happen, but the lowest paid salary can certainly be increased while CEO pay is decreased to level out somewhere closer to the middle. Offering salary and benefits totaling $80,000 to the lowest paid employee would make that position livable (and using my ratio of equal pay and value of benefits, this salary of $40,000 would essentially be an hourly salary of $19.24 (roughly)). As an entry-level position or an unskilled occupation, that salary would certainly appeal to most job-seekers. In this scenario the CEO would earn $640,000 annually, or $320,000 salary and $320,000 in benefits. Most Americans would agree that this is certainly a livable wage.
This is reform that would actually make a difference. While the current proposed legislation will make the rich richer, my scenario would lower the wealthy to a still wealthy position, just not as high while raising the lower paid positions to something that would benefit the people who truly need it the most; the rank and file who do the work that makes companies profitable. And by cutting the executive salaries to something reasonable, there will be more money available for creating more jobs, expanding businesses and conducting research. Under this proposal, there are more winners.
For anyone interested in reading the full report referenced above, a copy of it can be found here: http://www.ips-dc.org/wp-content/uploads/2017/08/EE17-final-embargoed-for-August-30.pdf
