If corporations create jobs and pay people who then pay taxes, how would/is increasing the taxes corporations pay help the economy?

Thanks for the question. A positive relationship between corporate tax cuts and “encouraging investment” that leads to economic growth is a fairy tale unsupported by data. It is, in fact, very similar to the fairy tale regarding supply side “trickle down” theory, which has also been soundly debunked (see The IMF Confirms That 'Trickle-Down' Economics Is, Indeed, a Joke).

Just let the data speak for itself. Take a look at Corporate tax rates and economic growth since 1947. Although there is a superficial correlation between higher(not lower) corporate tax rates and better GDP growth, there is not much evidence that lower corporate tax rates increase GDP growth. The net effect is statistically pretty neutral.

However, how those tax dollars are spent (and when in the business cycle they are spent) can result in highly variable impacts on the economy — which is why there is such a wide range of “multiplier” estimates for government spending (frequently between 1 and 3). In general, government expenditures during recession have a much larger positive impact than during an economic boom. Expenditures on infrastructure may provide an immediate boost to certain industries, but then a much longer and more gradual multiplier as new business expansion is built upon that infrastructure. In the same vein, government spending that results in free education can have a substantial impact on economic growth many years after those students graduate and become productive contributors to the economy.

But probably the highest “multiplier-friendly” activity the government can do is research: there is lot of research the private sector simply won’t do — and hasn’t done in the past — which leads to new innovations, technological advances, and even entire new industries. Many of the things we rely on today (cell phones, the Internet, computers, life-saving drugs, etc.) were mainly the consequence of government research that was then used to deliver products to the marketplace by private companies. And of course whenever government programs are able to put more money into the the hands of consumers, while at the same time government is directly spending on goods services, this can stimulate aggregate demand (and, consequently, GDP) much more than business investment alone ever could.

At the same time, there are of course lots of things government spends money on that aren’t really all that great in the multiplier department. A good example is defense spending. Some research (see Mercatus Center study at George Mason U) suggests that the multiplier impact of defense spending on the U.S. economy is less than 1. The hypothesis is that in defense industries specifically, government spending “crowds out” private sector spending. So again it does make a difference how the money gleaned from corporate taxes is spent.

But if government doesn’t have money to spend, then clearly either there is going to be less of a multiplier, or there or going to be government deficits. Now the impact on deficits on the economy is a bit more complex, so I’m going to duck that one for now. But suffice it to say that long-term deficits can actually mess up the economy in a number of unsavory and dramatic ways.

My 2 cents.


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