Browsing the blog archives for January, 2018.

The Corporate Response to Tax Reform

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Firms are starting to respond to tax reform. A recent report in the Washington Examiner chronicles 164 companies that have announced employee bonuses in response to tax changes (http://www.washingtonexaminer.com/boom-164-companies-give-bonuses-lower-fees-to-millions-citing-trump-tax-cuts/article/2645900). A number of companies have also announced increases in wages; Walmart is increasing the minimum wage for its employees from $10 to $11 per hour, although it’s being criticized—no surprise—for some store closures.

The takeaway point here is clear: Employers in a vibrant economy will raise wages without government mandates. Walmart must increase its own minimum wage or risk losing valuable employees. Companies don’t wait for politicians to act; they analyze the market and take action on their own. In fact, minimum wage laws only raise actual employee compensation when they forces an employer to pay more than the employee’s work is worth, and even then, for fewer employees (see earlier posts for a detailed discussion on this topic). Cut business owners and managers loose of burdensome regulations and excessive taxes, and most will look for opportunities to grow.

Progressives struggle to accept this reality. They typically claim that corporate tax cuts will end up in the pockets of rich shareholders. Rather than free businesses to grow the economy, they try to control them through taxes and regulations. Their approach leads to stagnation. Just look at the Obama years.

But while business response to corporate tax reform will be positive, many politicians and analysts—including Republicans and self-proclaimed economic conservatives—are falling into a trap. They claim to support tax and regulatory reform not because it’s inherently the right thing to do, but because businesses will respond in a way that benefits everyone else. They maintain that firms will do “the right thing” when taxes are cut, as if companies have an obligation to hire more employees. This line of reasoning reinforces the left’s argument that government has a lien on corporate profits, and tax rates and regulations should be manipulated to achieve the social and economic outcomes politicians desire.

To the extent that this can be measured, some firms will likely use the tax savings to raise dividends and/or buy back some of their own shares instead of hiring more employees and expanding their businesses. Opponents will cry foul when this happens because they did not do “the right thing.” These alternatives are good for the economy anyway, but that’s not the point. It’s their money. How individuals choose to spend it—as consumers, investors, or shareholders—is up to them, not Washington.

It’s exciting to see how these changes will spur the economy, but let’s remember…Capitalism, including minimal taxes and regulations, is the best economic system because it’s moral. The benefits it creates for society are welcome, but not the best argument for free enterprise.

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