Just Taxes Blog by ITEP

GM Announcement Confirms Tax Cuts Don’t Prevent, May Encourage Layoffs

GM Announcement Confirms Tax Cuts Don’t Prevent, May Encourage Layoffs

November 27, 2018

Matthew Gardner
Matthew Gardner
Senior Fellow

The news that General Motors will lay off thousands of workers in North America raised questions about the efficacy of the recent tax cuts and whether the company is giving the shaft to U.S. workers. But the truth is that last year’s tax cuts are not driving corporate investment decisions—at least not in the way President Trump claimed they would.

GM’s most recent quarterly financial report reveals the company has saved more than $150 million so far this year due to last year’s corporate tax cuts. So the layoffs announcement may seem especially jarring to anyone who believed President Trump’s claim that his tax cuts would spur job creation—including the Ohio residents Trump told directly “don’t sell your homes” because lost auto-making jobs “are all coming back.” But for mainstream economists, GM’s latest announcement is confirmation of what they already knew: Successful corporations will always base their investment and job-creation decisions on market fundamentals and consumer demand, not on incremental tax giveaways.

By all accounts, GM’s layoffs are happening because the company continues to produce a type of motor vehicle consumers don’t want to buy (sedans) instead of the SUV and crossover vehicles that are now wildly popular. No amount of tax cuts could change this calculus for GM: If Americans don’t want to buy Chevy Impalas anymore, then the sensible response is to make less of them. If GM responded to the tax cuts by ramping up production of a car that American consumers don’t like, the company’s shareholders would be sensibly outraged.

GM’s latest disclosure confirms what economists have observed throughout 2018: The corporate tax cuts pushed through by the Trump Administration last fall appear to have had little if any positive effect on the U.S. economy. In the 11 months since the so-called Tax Cuts and Jobs Act was enacted, publicly available data have shown that Fortune 500 corporations have used their tax cuts overwhelmingly to repurchase stock rather than to create new jobs or invest in capital infrastructure. This trend flies in the face of the Trump Administration’s promise that the corporate tax provisions, especially a tax holiday for profits stashed offshore, of which GM appears to have had as much as $6.5 billion, would spur a flood of new domestic investment.

Does this mean the Trump Administration doesn’t have any fingerprints on the sad saga now playing out in Ohio? Certainly not. By GM’s own estimates, the administration’s steel tariffs will cost the company around $1 billion, making it harder for the company to invest in productive capacity. And the thousands of families whose livelihood will be threatened by these layoffs will find that the federal government is less able to provide vital transitional aid, from job training to unemployment benefits, which should be available to help these families move past the layoffs. In both the short term and down the road, the Trump tax cuts have hamstrung our nation’s ability to pay for public investments that could help laid-off workers find new jobs.

Even worse, the Trump tax plan arguably encourages domestic layoffs when it’s part of a shift to offshore employment. As we have noted in the past, the new tax law’s territorial system (which exempts most profits reported in other countries) provides a clear incentive for companies to move operations and jobs offshore to take advantage of lower tax rates. So if GM’s layoffs are part of a broader move to shift jobs overseas, the Trump tax cuts could certainly be part of the reason why.

When federal lawmakers enacted the Tax Cuts and Jobs Act, it was a solution in search of a problem. At a time when corporate tax levels were already near historic lows, and corporate profits near historical highs, the tax plan’s authors hoped against hope that doling out huge corporate tax cuts would encourage already cash-rich corporations to create new jobs and new infrastructure—even though these firms generally already had the resources to make such investments if they saw the opportunity. GM’s layoffs are just the latest in a long series of reminders that this hope was in vain. Corporate investment strategies are, and must be, based on the dictates of the marketplace. If continuing to produce the Chevy Impala made no sense to GM’s leaders before the tax cut, doling out billions of dollars in corporate tax giveaways simply can’t change that logic.