Wednesday, December 20, 2017

Unintended Consequences of Recent Tax Bill: No New Jobs

On the news that the recent Republican tax bill would be passed, the stock market went up. It's not a sign that they think it's good for the economy. It's a sign they think the stock prices will increase. How? More corporate profits will happen with lower corporate tax rates. More profits means more money for...stock redemption (i.e. stock purchases), which means fewer shares on the open market. Therefore the enterprise value is divided by fewer shares and the value/share increases...stock prices go up...stock market indices go up. Investors are happy.

But it doesn't mean more jobs or higher paying jobs. Before the passing of the tax bill(s), corporate profits have already been at record levels. Corporations have more cash now than ever before. What have they been doing with the cash since the Great Recession of 9 years ago. They've been buying back stock to drive up the stock price. Executives are deemed successful if they can increase the stock value for investors. They are also rewarded through stock options (and so on) and so higher stock prices are important to them as individuals also.

Another unintended consequence of this bill is the movement of corporate expansion overseas. There are tax incentives for overseas construction of new facilities, incentives to sell from foreign subsidiaries to the US (because the tax rate is half the maximum proposed rate), incentives to keep money overseas because foreign tax rates are still lower than US rates (or if they're higher then there's no US taxes anyway).  [Listen to the last half of the radio show with the Stephen Shay interview; he's a former Deputy Assistant Secretary of the Treasury.]

Instead of helping all Americans with the change in corporate taxes, it's going to help investors and executives of they move jobs overseas. It's not a job creating tax bill.

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