The Insatiable Beast

Big Government, Big Business, and Corporate Taxes

I saw this tweet the other day and it struck me as either dishonest or showing a poor understanding of economics.  The implied message here is that executives are overpaid and greedy and society would be better off if the money was put in the hands of the government.  Put simply, these companies should be cutting executive salaries and paying more taxes.  This is not an unusual message from supporters of big government, especially those on the left and socialists and it’s not an unpopular message if this recent Gallop poll is any indication:

Reich’s message, boiled down to the basics is that “the rich” are not paying their “fair share” - “how dare these companies use the tax codes (created by the government by the way) to reduce the amount they owe in taxes and reward their employees for the company’s success?!?”  It’s not really that simple though, especially when you consider the “games” that Mr. Reich is playing.

The obvious game is providing a number over a 5-year period while at the same time not indicating how many executives are being paid.  This “math trick” is used to make the number appear as large as possible.  To beat this, we need to examine the details.  For simplicity’s sake, let’s focus on Tesla.  The Car manufacturer employes approximately 140,000 people.  How many of them are executives?  I honestly don’t know and can’t seem to find out, so we’ll have to make an assumption.  If we assume 1 executive for every 100 employees (yes, this is a guess, but it seems reasonable to me) then the math breaks down as follows:

• $2.5 B over 5 years is $500M per year.

• A 100:1 employee to executive ration gives us 1,400 executives.

• The average executive salary is therefore $357,142.86.

There’s no question that is a lot of money but it’s a lot less than most of us probably would have guessed given Reich’s starting point of $2.5 billion.  You might also be surprised to find out that this salary wouldn’t even put someone in the “Top 1%,” the group of people most denigrated by the socialist left.  This does however put the average executive in the “Top 2%” and doesn’t really address the implication that Tesla and the rich are getting a free ride which is where Reich’s second trick comes into play.

Reich’s next game relies on the reader believing that Tesla is evading taxes by giving “rich” executives big pay checks, and as a result that the government sees nothing.  The reality is that the government actually gets a lot of taxes (unless the executives are burying the money in their backyards, putting it in a pillowcase under their beds, or illegally moving it “offshore”) because every single transaction that an executive makes with their money is taxed (and the same applies to you).  For starters, there’s income tax.  Someone who made $357,142.86 in 2023 would have, on average, paid $72,514 in federal income taxes (if they’re married and filing jointly).  If you’re wondering how this compares to Mr. Reich’s tweet above:

• Number of executives – 1400

• Taxes paid - $72,514 per executive

• Total annual taxes - $101,519,665

• Taxes paid over 5 years – $507,598,000

• To be fair let’s subtract the $1M refund Tesla received - $506,598,000

$507 Million in taxes paid on $2.5 Billion in salaries is a tax rate of about 20%.  That’s not bad but more importantly, that’s not zero taxes as Mr. Reich tweeted (and we didn’t even add in the taxes paid by the other 138,600 employees or state income taxes).  The rules that govern executives govern you as well and there are only a few things you can do with your money, save it, invest it, spend it, or give it away.  If you save or invest it, the government taxes any interest (min 10%) or capital gains (15% for this salary level).  If you spend it, the government gets some of that in the form of sales tax.  What’s more, any profit that the company you shopped at is taxed as well.  Oh, and don’t forget that, if God forbid, you die, the government likely taxes that as well. Trust me, the government is like “the house” at a casino, it always gets paid.  The only action that isn’t taxed is when you make a charitable donation and in that case what you’re actually doing is deciding to give your money to a charity instead of letting the government take it.  Reich’s argument that the government isn’t getting its fair share (or “the rich” aren’t paying their fair share) is flat out wrong.  In fact, “the rich” pay the majority of income taxes collected by the federal government with the top 5% paying approximately 70% of all taxes collected.  You might argue that they should pay more, but they’re not getting a free ride.

Note: there’s also the federal employment tax rate, which is 15.3%, with the employer paying 7.65% and the cost of workers’ comp, benefits and state and local requirements all of which contribute to the cost of having employees in addition to the salary or wages you pay them.  However, we’re starting to get into the weeds (and way out of my depth) here and since Reich stated that Tesla paid no taxes, we’ll just assume this is zero for simplicity’s sake.

Aside from “the rich” and corporations not paying “their fair share,” the tweet has one final unstated argument: the government would do a better job of spending your money than a company, the executives, or you would.

Well, would it?

The first thing to get out of the way is this: increasing corporate taxes would not mean your taxes would decrease.  Even if you do think you’re paying more than your fair share.

The government is an insatiable spending machine and rarely (never?) cuts anything.  What’s more, it spends more than it gets in taxes (The US deficit at the end of February was $830 billion) so increasing corporate taxes would just increase the amount of money it spends.  So, if you think raising corporate taxes means you’ll get a break, put that out of your mind now.

Looking at the 2024 budget gives us an idea of where the money would go if corporate taxes were increased.

62.3% of spending goes to social programs.  Put simply, the taxation system is largely a wealth transfer system, it takes from some and gives to others.  There’s nothing inherently wrong with this, society should take care of the less fortunate and older retirees (don’t forget your taxes also pay bureaucrats and politicians), but from a GDP standpoint it is largely a wash as the money would be used on food, clothing, and rent (by the poor, middle class, and rich) or invested in the stock market (by the middle class and rich) regardless of who possess it.   Another 10.8% goes to payments on the debt leaving 26.9% which goes to education, transportation, national defense, etc.  This contrasts with how corporations spend profits which is paying back investors, reinvesting it in the company, and rewarding employees (although technically this last one reduces profits).

This is all interesting (at least to me) and what the government spends our taxes on is a source of much heated debate but from a GDP standpoint is largely irrelevant as, aside from the 1% that goes to foreign aid and the 2.6% that goes to US debt held by foreigners the rest just goes back into the economy.  A more important question is “what would raising corporate taxes do for/to the economy?”

Well, what would it do?

You probably won’t be surprised to hear that the answer is “it depends on who you ask.”  This shouldn’t be a surprise as very few things are black and white.  Those advocating for higher corporate taxes state:

• Corporate tax rates have historically been higher and therefore should be increased.

• Higher corporate taxes would make the tax code “fairer” and generate more tax revenue by:

  • Making “the tax code more progressive while helping to generate the revenue needed to help finance investments.”

  • Ensuring “that U.S. multinationals pay their fair share while positioning the United States as a leader in global tax negotiations.”

Those against argue:

• It erodes the tax base – Every one “point increase in corporate taxes shrinks the tax base by 13.6%” reflecting the relative ease with which firms can move to lower-tax jurisdictions.

• It reduces wages – especially for young workers, the low-skilled, and women.

• It’s inefficient – an argument put forth by economists at the Organization for Economic Co-operation and Development (OECD).

Googling “Academic papers on the effects of corporate tax rates” provides 1,400,000,000 results.  In comparison, Googling “New York Yankees” gives 95,100,000 results, so it’s safe to say it’s a popular topic and we’re unlikely (ha!) to resolve it here.  However, a commonsense approach can provide some insight that perhaps escapes the academics.  When taxes increase corporations have only a few choices and the question is: if faced with higher taxes which action are corporations likely to take?

1. Cut profits (this is the “do nothing” approach).

2. Cut wages.

3. Raise prices.

Those arguing for higher corporate taxes rely on you believing that corporate management will shrug its collective shoulders and let profits take a hit.  The problem is that their goal is to maximize shareholder value (i.e. make money) not pay the government, so the last thing they’re going to do is cut profits.  Ideally corporations would prefer to pass on the cost of increased taxes to the consumers by raising prices.  The problem is that basic economics means that you can’t just raise prices and expect to sell the same number of products.  Instead, what is likely to happen is that as prices rise, sales volumes fall.  This reduces profits, the number of employees needed, or both.  In either reduced profits cancels out the rate increase or the tax revenue generated by raising corporate taxes is offset by lost employee income taxes.

Conclusion

Robert Reich is a very smart and successful person.  He was the United States Secretary of Labor under President Bill Clinton, is the Chancellor's Professor of Public Policy at the Goldman School of Public Policy at UC Berkeley, was a professor of social and economic policy at the Heller School for Social Policy and Management of Brandeis University and was a lecturer at Harvard University's John F. Kennedy School of Government.  I believe I am on firm ground in stating that he is not a simple thinker and understands all the arguments I’ve put forth here, likely much better than I do.  The tweet is therefore not ignorant, but dishonest.  Or to put it in the most positive terms, intentionally misleading.  It is propaganda.  His goal is to convince the voting public that businesses and “the rich” do not pay their “fair share” and he does this because he believes that the government would do a better job spending your money than you would. His message is “elect us and we’ll raise corporate taxes and taxes on ‘the rich’ and society and you will be better off.”  It’s a beautiful lie, but there is evidence to show that the public is more receptive to it than the harsh reality that increasing corporate taxes is at best a shell game that does little but move money around and at worst harms the economy. 

Worse, demands for more taxes will not end with an increase in the corporate tax rate.  The government, as I said, has an insatiable appetite for taxes and a fervent belief that they know what’s best for everyone.  Another tweet by Robert Reich foreshadows big government’s next target:

It’s time to stop feeding the beast.