I found this answer on Quora and I’m curious the kind of reaction it might get here (and no, it’s not me).
The GOP claims that the proposed tax cuts for the wealthy and for corporations will trickle down in the form of higher wages, jobs, and healthier retirement plans for the middle class. Has that ever actually worked?
Let’s do a thought experiment. You are the CEO of International Widget Corp. Your corporation’s taxes have just been slashed and you now have an additional $20 million in after tax profits without selling even one additional widget. Here of some of the options you have for using this windfall:
- Go out and hire a lot more people.
- Give all your current employees a nice raise.
- Invest in modernization
- Give bonuses to top execs and increase shareholder dividends
Right away we can rule out option 1. Demand for your widgets has not changed. You don’t need to make more widgets so you are not going to hire any more people. Option 1 makes zero sense from a business perspective.
What about option 2, give all current employees a nice raise. That also does not make business sense. There is a market value for widget makers and that is what you are paying. If you start paying your widget makers more, your unit manufacturing costs will increase and you will loose a competitive advantage with respect to your market.
Why not start modernizing some of your widget plants? That could lower costs in the long run and make you even more competitive in the market. But, modernization projects take years of outlay before you start seeing any returns. And you are already efficient enough to meet your top competitors’ prices. Not a good use of funds at this time.
So, we’re down to option 4, you will increase bonuses for all of your top execs and increase dividends for shareholders. The execs will be very happy and therefore less likely to leave your company for a competitor. And the shareholders, at least the ones that own a significant portion of your shares, will be thrilled. And since a lot of those folks are also on the board of directors, you will likely get a large bonus as well, and maybe even a new contract.
So, will tax cuts for corporations and the wealthy “trickle down” to middle class workers? Absolutely not!
Is he wrong, if so, why?