Follow the Money

Where does a corporate tax cut go? Let’s follow one billion dollars as it gets diverted from the IRS into the financial system.

Megacorp gets a billion dollar tax cut. However, on the same day as the money arrives there are no billion-dollar opportunities waiting for investment. Company management invests in new product lines and billion dollar capital investments such as factories with an outlook and schedule of years of planning. A tax cut could be taken away by the next administration – it isn’t a reliable source of funding.

It isn’t reliable, but it is a windfall. Found money goes into quick return financial shenanigans such as stock buybacks and retiring corporate debt. This what happened to the Bush tax cuts in 2004.

OK, Megacorp spends 800 million on stock repurchase and 200 million on retiring corporate debt. Where does the money go?

Most common stock is held by funds – retirement funds, pension funds, and insurance funds. Most corporate debt is held by similar funds. So almost the entire billion dollars is injected as cash into the funds. Funds have rules for what to do with the cash from non-recurring sources – reinvest it. (The same for recurring sources such as dividends and interest payments. The point is that it won’t be a direct or immediate distribution.) So one billion dollars is almost immediately invested into the financial markets.

The money will eventually find its way out of the funds in the form of distributions to individuals at retirement. At this point, many years after it was given to Megacorp, it starts to turn into consumer spending that benefits the pensioners and retirees and the larger economy. During that time inflation and management fees have cut into the amount, though general market growth may have offset that.

And, of course, it will be taxed. But the tax will be paid by a retiree, not by Megacorp.

Bottom line: Corporate investment uses reliable funding sources and has a long timeline. Tax cuts don’t fit that description. The money does eventually trickle into the consumer economy years afterward. Infrastructure investment would create more jobs, immediately, than any tax cut.

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