Tax Holiday Led to Layoffs at Major Companies: Report

[donsutherland1]

From CNBC:

Ten major U.S. corporations, including big banks Citigroup and Bank of America, laid off workers after enjoying a tax holiday in 2004-2005 that had been billed as a form of economic stimulus, said a report released on Tuesday.

With large multinational companies today pressing Congress for another tax holiday, the Institute for Policy Studies reported that the last one did not fulfill its rosy promises for hundreds of thousands of U.S. workers.

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This outcome is not surprising. Research has indicated that such provisions have little or no multiplier. For example, the CBO estimated that the multiplier ranged from 0.0 to 0.4. Tax rate changes can have a supply-side impact, particularly when they are permanent in nature. However, when the economy is dealing with a shock to aggregate demand, as was the case during the 2001 and 2007-09 recessions, temporary tax cuts can lead risk-averse companies to pocket the cash rather than expand operations. Only when underlying demand increases and productivity enhancements can no longer fully increase production to meet that demand does hiring take place. Today, risk aversion prevails and much uncertainty exists with respect to aggregate demand going forward. In economic circles, there is growing debate about the state of U.S. competitiveness, the need for a structural change in the composition of the U.S. economy, exposure to spillovers from overseas e.g., Europe, and structural imbalances. The outlook for personal consumption expenditures--still 70% of GDP--is still not very rosy and downside risks are present.