President-elect Trump’s claiming to save 1,100 jobs at Carrier in Indiana was all over the news. A closer look says that it isn’t that many. Of course, Trump tried not to say anything about Carrier’s tax break.
A Wall Street Journal article says the number of jobs saved was 700. “The Indiana governor was offering $7 million over 10 years to encourage the company to keep in the state roughly one-third of the 2,100 jobs it planned to ship to Mexico” (link).
A Wall Street Journal article says the number of jobs saved was 700. “The Indiana governor was offering $7 million over 10 years to encourage the company to keep in the state roughly one-third of the 2,100 jobs it planned to ship to Mexico” (link).
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Chicago Tribune article says the number of jobs saved was 800.
“Carrier, he said, had agreed to preserve 800 production jobs in
Indiana. (Carrier confirmed that number.)” Link.
Does this tax break make sense for Indiana? I will use the Chicago Tribune’s number of 800 jobs.
Assume $50,000 income per worker. That's very close to the that of the Carrier workers. State income tax =$1,617 = 3.23% for single, $1,584 = 3.17% for married. I’ll round the midpoint. 800*$1,600*10 = $12,800,000.
So at first glance Indiana gains about $5.8 (=12.8 - 7) million in tax revenue. (700 jobs implies a $4.2 million gain.) However, this assumes the 800 workers would otherwise vanish from Indiana's workforce such as being unemployed or moving out-of-state. Therefore, it is clearly an unrealistic assumption. If that were true of only 200 jobs, Indiana has a net loss of $3.8 million (= 200*1,600*10*10^(-6) – 7.0). Indeed, if that were true up to 437.5 (=(7*10^6)/(1600*10) jobs, Indiana has a net loss.
One thing that could justify the state government's decision -- one I didn't think of when I first posted this -- is unemployment benefits that Indiana could pay if these 800 workers were laid off. $7,000,000/800 = $8,750 per worker. A few months unemployment benefits could cost the state government that much. Beyond that I can only guess. Also, how much such benefits might be (hypothetically) could be diminished by severance benefits from Carrier.
Regarding Carrier’s decision its parent, United Technologies (symbol UTX) is relevant. UTX is a huge defense contractor. Perhaps the high-level executives at UTX considered saving those jobs in Indiana – rather than saving costs by having the work done in Mexico, estimated at $65 million – creates good will that will pay off when UTX deals with people in the Trump administration regarding defense contracts in the future. $65 million is not a lot for UTX; 2015 revenues were $56 billion and net income was $7.6 billion. Of course, it's a good deal to those who keep their jobs. Nevertheless, prima facie, it doesn’t look like a good deal for the Indiana state government and hence for the people of Indiana in general.
A couple of other factors making it not such a good deal. First, Americans will have to pay more for air conditioners than otherwise. That will take money out of their pockets that could have created jobs elsewhere in the economy. It's the seen vs. the unseen.
ReplyDeleteAlso, the Carrier deal could discourage foreign direct investment in the future. A foreign manufacturer would wonder, "If I built a factory in the U.S., would Trump decide to impose a special tax on me in the future if I needed to relocate? I don't want to take that chance. So think I'll pass on building that new U. S. plant [and creating more American jobs]."
It's not good to mess with the invisible hand.
Great points! I hadn't thought of the second one. Thanks.
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