How does this work?

Ritchie notes an article:

Japan’s Wages Too Low and Corporate Cash Hoard Too High: IMF

His answer:

So the answer is, increase wages and reduce cash piles.

Which means higher corporation taxes on large businesses should be on the international agenda, but they’re not.

Why not?

How does higher corporation tax increase wages?

In fact, given the incidence of the corporate tax, it will reduce wages across the economy…..

11 thoughts on “How does this work?”

  1. I think he means that higher corporation tax will reduce the cash piles, as will higher wages, as the higher wages/tax will end up being paid out of the cash pile.

    He still doesn’t seem to realise though that if you increase wages you automatically through the operation of Sums decrease the amount of corporation tax levyable – so that will be why he argues to increase corporation tax, so the taxation stream remains the same (or preferably higher) from the reduced profits being taxed. Not sure how you end up having to use researves to pay tax on your profits unless the taxation rate is higher than 100%

    I wonder what his reaction would be to a firm paying such high wages that there’s nothing left over to levy corporation tax on. Actually, I think I know. Sthcream and scthream and sthcream about tax avoidance.

  2. Surely eventually the companies will have to deal with higher wages by changing costs or changing income? Perhaps a 10% wage increase with a cut in staffing to keep wages bill the same?

  3. So is he really saying he expects companies to run at a loss and cover it from reserves, rather than the logical route of ceasing trading and distributing the (already taxed) reserves to shareholders? I suppose it’s redundant to say I don’t think he’s thought this through.

  4. @Nemo – that’s more or less what I was about to say.

    OK, so 1st order effect – increase wages (flow) to reduce a “cash pile” (stock).

    2nd order effect – company runs at a deficit, in order to a) consume more of the incoming flow, and b) reduce the stock of the cash pile.

    3rd order effect – a deficit is another word for a “loss”. Corporation tax is levied on cumulative *profit*, which is (to a first-order approximation) delta-cashpile, i.e. a flow. Hence corporation tax paid is reduced, since there is no profit to be taxed.

    4th order effect – this loss will cumulate and can be carried forward, reducing the corporation tax burden once the company stops running at a loss.

    So, Ritchie wants companies to run at a loss and thereby pay no corporation tax.

  5. Bloke in North Dorset

    “I wonder what his reaction would be to a firm paying such high wages that there’s nothing left over to levy corporation tax on”

    We know. Remember when Amazon paid its UK tech team huge bonuses and three steps no corporation tax? He and the rest of the green eyed monsters went ballistic.

  6. Aside from reducing future profits, and increasing opportunities for rivals, don’t companies need reserves for rainy days? BHS could have used one. These piles may seem big, but they may not be relative to the overall scale of the operation.

    Besides, this would mean only certain employees getting the extra (those in firms with the big cash piles). And it’s not the employees that own that money anyway.

    The better way would be to release the excess via special dividends – if required, and generally promote and encourage share ownership.

    Like that ghastly Fatch suggested.

  7. These ndays in the UK, as the Bank of England has shown, UK corporates are holding large cash piles, probably because it was so difficult to get banks to lend money to them after the crash. Higher corporation tax rates do not hit this perceived problem because the companies are just manipulating cashflows rather than making extra profits and corporation tax is levied on profits rather than cashflows. Did the fat one ever get an accountancy qualification?

  8. abacab, “once the company stops running at a loss” because of course the employees on the receiving end of the distribution will be only too glad to see their wages go back down once the cash reserves are at a level acceptable to a pompous buffoon from Norfolk. I wonder if he’s ever heard of ‘elasticity’.

    I do like to imagine the executives explaining the plan to shareholders though: ‘Well, we’ve got all this money of yours getting in the way, so we’re going to stop being competent managers until we’ve burnt through it. Everyone happy with that?’

  9. I am doubly surprised by the headline on the post here- he famously once was proud to admit, when questioned by various ‘neoliberal trolls’ about the Japanese experience with People’s QE, that he ‘knows nothing about Japan’ – maybe he envisaged himself as the type of guy being commemorated at Tokyo’s Yasukuni Shrine….

  10. It is interesting to riff on the theme of cash piles. When companies have cash on the balance sheet, it rarely means that corporate HQ is stuffed full of folding stuff. It is usually kept in a bank. And what do banks do? Only in Murph’s world is that bad. Bank investment bad : Murph investment good.

  11. I hear you cry out about secrecy jurisdictions…. Let me tell you that big D has a secrecy jurisdiction of unexcavatable depths

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