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New Study Confirms that Lower Corporate Tax Rates Don’t Create Jobs

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Corporate executives love to peddle the notion that they need to have their low tax payments reduced even further, even as the share of GDP represented by company profits is at unprecedentedly high levels. In fact, corporations paid between 5% and 6% of GDP in taxes in the early 1950 versus a trivial 1.3% in 2010. The GAO reported earlier this year that the effective Federal tax rate paid by large corporations in 2010 was 12.6%, versus a nominal rate of 35%. And roughly 10% of large companies pay no Federal tax at all.

One of the arguments made by big companies in favor of making their low payments even low is that they’d go out and create more jobs. This is clearly spurious. Large companies are already awash with cash, thanks in no small measure to taking advantage of the Fed’s largesse and issuing bonds. They could invest and create jobs with the dough they already have if they were so inclined. But in fact, large corporations have been shedding jobs for some time, since Wall Street reacts positively to downsizing and higher stock prices lead to bigger executive pay packages. And don’t blame the crappy economy. Big companies weren’t investing even in the last expansion; they had abandoned the role of capitalists and were net saving. Large companies have been more keen to buy back stock than invest in the business of their business.

Tax maven Linda Beale today recaps this argument and summarizes new supporting evidence in the form of a study by the Center for Effective Government. As Beale reminds readers,

I’ve argued frequently in the past that there is no there there–i.e., that lowering corporate tax rates will do nothing to create jobs. Instead, I’ve said, it will simply deliver an even higher profit margin to be skimmed off by the highest paid executives and, possibly, shareholders. The higher profit margins are unlikely even to be used to increase workers’ shares of the corporate revenues through higher wages, a place where they could most help the economy other than new jobs created. Thus, the drive for “revenue neutral” corporate tax reform (cut corporate taxes, cut expenditures elsewhere to make up for the decreased corporate tax revenues) is just another example of corporatism as an engine of the modern form of US class warfare.

And why is Beale so confident in her view that corporations will take the funds saved through tax breaks and dispense it in dividends and higher executive pay rather than hiring staff or reinvesting? Because every time the US has done that, it’s precisely what happened. As tax expert Lee Sheppard wrote in Forbes:

Even if Congress naively were to believe that tax-free repatriation of untaxed foreign profits were a good idea, we’ve been there, done that, and got bike oil on the T-shirt. In 2004, Congress granted a tax holiday, and companies with big stashes of offshore profits attributable to valuable intangibles—that’d be pharma and tech—repatriated billions of dollars in the form of dividends and executive bonuses.

The Center for Effective Government study, The Corporate Tax Rate Debate: Lower Taes on Corporate Profits Not Linked to Job Creation, is particularly damning. It shows that small businesses, who have long been the engine for job growth, pay more in taxes than their grousing big company brethren, an average rate of 19% when you include Federal, state, and local versus 16.9% for the big boys.

But even more telling is that among the 60 large companies it examined in depth, tax payments are if anything negatively correlated with job growth. Beale’s recap:

The study, for example, found that a supermajority (22) of the 30 corporations paying the HIGHEST tax rates created 200,000 jobs between 2008 and 2012, while only 8 of those 30 had any reductions in the number of employees. In contrast, the 30 profitable corporations paying no or very little taxes in that period had an aggregate loss of more than 51,000 jobs–half created a few jobs and half reduced jobs between 2008 and 2012.

And the report also points out that the revenue loss from giving companies tax breaks is significant:

In 2012, U.S. corporations reported earning nearly $1.8 trillion in profits. Had they paid the 35
percent tax rate on those profits, total corporate tax receipts would have been $630 billion (rather
than the $242 billion they actually paid), and the deficit would have been reduced by nearly a
third.

And please, spare us the other intelligence-insulting lobbyist argument for more tax gimmies, “taxing corporations is unfair because those poor investors would be taxed twice.” Everyone is taxed multiple times, so stop running the canard that investors deserve to be a protected class. Workers pay FICA and income taxes, which means sales tax payments come out of income that has been previously taxed. You also pay the real estate taxes of store owners when you buy goods or eat out. You pay the gas taxes on the shipping costs of products you buy online (again out of your after tax dollars!)

Citizenship carries obligations. Corporations have managed to secure the advantages of personhood, so they need to live up to the other part of the deal and pay their fair share. Anything less is just another form of corporate welfare.

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35 comments

  1. Hayek's Heelbiter

    Re the last tax holiday.

    How many jobs did one of the world’s largest pharma companies create after receiving the largesse from overseas?

    -50,000, or for the accountants amongst us (50,000).

    How much money did the retiring CEO walk away with?

    /snark/ Priceless.

  2. AbyNormal

    “You can’t tax business. Business doesn’t pay taxes. It collects taxes.”
    ronald reagan (yall ever get the feelin someone swapped his script…like the gun swap on Brandon Lee)

    1. scott

      A simple rule could fix this. If a public company wants to buy back their own stock, then they must adhere to some sort of executive compensation pay ratio rule (top pay divided by lowest pay).

      Paying executives with stock options is what creates this perverse incentive. Either everyone in the company gets options or no one.

      1. F. Beard

        Stock buy backs are often financed by the government-backed counterfeiting cartel since the purpose of a common stock company is to consolidate capital for economy of scale by issuing shares and not dissipating it by buying those shares back.

        The reasoning around here is pretty scruffy at times and could benefit from a close shave with Occams’s Razor, I’d say.

  3. allcoppedout

    Concise and effective piece. Underlying this reality is a mess of ideology on work and reward that actually makes no sense. Greg Leroy published ‘The Great American Jobs Scam: Corporate Tax Dodging and the Myth of Job Creation’ in 2005. No one outside our circle is listening. We lack understanding of the ideological trancing going on.

    In the UK the whole of our agriculture is worth £5 billion (£3 billion is EU subsidy), yet pour £49 billion into slot machines. We grow 60% of our food now against 80% in 1984. There are many examples of the rank stupidity such as Yves provides on taxes and jobs.

    The problem is we can’t accept the system is broken and never worked as claimed. Some people are now making so much money in a year that we are effectively going to have to support them and their dynasty with our work forever. We need to start talking about high ‘pay’ in these terms, instead of the rubbish of meritocracy and justification we get.

  4. Chromex

    Well it is true that a corporation IS a legal fiction. Corporations never walk down the street and therefore one can conclude that not one corporation in the history of the US has ever paid one cent of tax. PEOPLE pay taxes and the question that the researcher should focus on is ” assuming a higher rate of corporate taxation, where does the incidence of the tax fall?”
    The incidence could fall to the corporate executives, the shareholders, or the corporation’s customers or be divided between them.
    I do agree that the researcher has come up with a good argument that cutting corporate tax does not create jobs. The question that remains is who pays the higher rate and what does that do?
    You CAN imply from her research that if the “breaks” go to the execs and shareholders, they are who pays the tax. But its not a layup and its a complex subject.
    I am not arguing here for lower corporate rates. However it might be more effective to raise the rates on individuals with high earnings.
    After all, if it is true, as you say, that we all pay for the various gas and property taxes of the businesses that we patronize,( and it appears to be so) that argument supports the idea that the incidence of an increased corporate tax MAY turn out to be regressive. Right now, subject only to competitive pressure, the corporate executives and the cost accountants that work for them get to decide on the incidence of the tax.
    A higher individual rate for high earners is a little more difficult to divert to the vanishing middle class.

  5. PaulW

    Cutting corporate taxes denies governments revenue. It’s all part of the process to make sure government does not work. As these governments fail the same politicians who granted the tax cuts then claim more reforms are needed to reduce government. If they were for small government across the board then they might have a shred of credibility. Instead, while reducing all the social aspects of government they increase government by creating the security state. Money for cameras on every corner but less money for universal health care. To be precise, the goal is to show the masses that the social/welfare aspect of government no longer works and should be done away with. More money for the Country Club types!

    We’ve seen this play out in Canada’s health care debate. Funding is cut then the same politicians claim the current system doesn’t work. If it doesn’t work it is because of their cuts! No surprise that as corporate tax rates have declined in Canada funding to health care has also declined. To make matters worse, the entire political class, regardless of party, accept the narrative that the system no longer works, and needs reformed, without question. Which means we have no choice to vote in anyone who will oppose the cuts. Quite laughable that a rich, modern country of 30 million people can have a doctors shortage for the last 20 years. Why would the political class which has created this shortage want to fix it when it is the best way to impress upon the average citizen that the system no longer works? Quislings! If you think you can fix this without violent revolution then I wish you luck.

  6. Jack H

    The author cites “Thus, the drive for “revenue neutral” corporate tax reform (cut corporate taxes, cut expenditures elsewhere to make up for the decreased corporate tax revenues) is just another example of corporatism as an engine of the modern form of US class warfare.
    Read more at http://www.nakedcapitalism.com/2013/12/new-study-confirms-that-lower-corporate-tax-rates-dont-create-jobs.html#TSOF0tVFz84MVuHc.99.”

    Revenue neutral corporate tax reform does not mean that at all. Revenue neutral means just that, not cutting both revenue and cutting expenditures “elsewhere.” Most advocates of revenue neutral corporate tax reform propose lowering the marginal tax rates and replacing that lost revenue by eliminating many of the loopholes that have been incorporated over the years.

    Since investment decisions should be made based on marginal income, this would have the effect of increasing investment and, therefore, employment.

    1. Fiver

      “Since investment decisions should be made based on marginal income, this would have the effect of increasing investment and, therefore, employment.”

      But you just read that corporations sinking under the load of record profits not only aren’t paying corporate taxes, but are also neither investing nor creating jobs.

  7. TomDority

    Un-tax wealth creating activity and Tax economically rent extractive activity. We have an unjust revenue system that favors rentier activity.
    The oligarchs live off the wealth creation of others (wealth creation requires labor in its production always) break oligarchy thru taxation and, bring that ill-gotten gain back into public use.

    Tax land -single tax.

    Taxation is the sovereign biggest club – largest power.

    “In spite of the ingenious methods devised by statesmen and financiers to get more revenue from large fortunes, and regardless of whether the maximum sur tax remains at 25% or is raised or lowered, it is still true that it would be better to stop the speculative incomes at the source, rather than attempt to recover them after they have passed into the hands of profiteers.
    If a man earns his income by producing wealth nothing should be done to hamper him. For has he not given employment to labor, and has he not produced goods for our consumption? To cripple or burden such a man means that he is necessarily forced to employ fewer men, and to make less goods, which tends to decrease wages, unemployment, and increased cost of living.
    If, however, a man’s income is not made in producing wealth and employing labor, but is due to speculation, the case is altogether different. The speculator as a speculator, whether his holdings be mineral lands, forests, power sites, agricultural lands, or city lots, employs no labor and produces no wealth. He adds nothing to the riches of the country, but merely takes toll from those who do employ labor and produce wealth.
    If part of the speculator’s income – no matter how large a part – be taken in taxation, it will not decrease employment or lessen the production of wealth. Whereas, if the producer’s income be taxed it will tend to limit employment and stop the production of wealth.
    Our lawmakers will do well, therefore, to pay less attention to the rate on incomes, and more to the source from whence they are drawn.”

    Written around 1925

    “In the United States, people are wont to talk feverishly and vindictively about the “non-taxpayer”, for it is here that our brother from Mexico, our cousin from over the Canadian Border, our friends from India and the Middle East come to escape the rigors of their respective locations
    They proceed to use our highways and our libraries, our water systems and our police protection. If they have children old enough and stay long enough, they use our public schools etc., whereupon there is a great cry about non-taxpayers taking advantage of our benefits of government. Because these visitors and temporary residents don’t own property and are not listed with the tax man, the general supposition is that they pay no taxes.
    A itemized account of the money spent by these “guests” over a period of time would yield some surprises. Naturally, the itemization includes practically everything permanent residents would buy, food, clothing, housing, luxuries and the usual necessities.
    A little thought will show clearly that while the guest owned no property here, the hotel proprietor, the restaurateur, the merchant, the grocer, the druggist, everyone in fact, from whom he made purchases did own property, and that property was subject to taxation. The tax on the buildings and merchandize was simply added to the other overhead expenses in the bill of the proprietor and merchant.
    The property owner acted as a collector and ultimate consumer, whether a native son or a wandering guest, paid the tax. The guest who owned no property himself in the United States paid a tax whenever he slept with a roof over his head, paid taxes every time he bought a cigar or steak. A man could no more pass through the United States and purchase a meal or a night’s lodging without paying taxes than he could buy a gallon of gasoline for his car without paying the gasoline tax.
    The “non-taxpayer”? He belongs to the class of griffins and unicorns and other fabulous animals. There is no such creature.”
    Written around 1925

  8. Steve Roberts

    When there are cases like this where a limited shift doesn’t produce an obvious outcome, I always like to take it to the extreme. See if the argument holds up.

    Does moving the corporate tax rate from 35% to 30% change the number of jobs? Not obvious.
    Does moving the corporate tax rate from 35% to 100% change the number of jobs? Yes, without a doubt.
    When we take our scenario to the extreme it is obvious an impact is being made. Small incemental changes produce outcomes which are safely argued as ignorable.

  9. Jim Shannon

    We clearly need to eliminate ALL corporate Taxes – except fees for the use of municipal services!
    All income from all sources – to include a stockholders share of corporate income should be taxed as personal income, to include capital gains!
    If anyoone was really interested in creating jobs then they would eliminate the Plutocracy which only cares about creating more CentaMillionaire$ and Billionaire$ and preserving THEIR wealth.
    Tax all income and net worth over $10,000,000 at 100% and instantly create tens of millions new jobs and real Democracy!
    But no one in power will ever propose such a thing! Extracting ever more wealth from society has always been Job #1 of all CentaMillionaire$ and Billionaire$! Money talks and money corrupts!

  10. Susan the other

    630 v 242 billion in lost tax revenue is huge. And the justification for lower taxes is always productivity, i.e. more revenue ergo more paid in tax. Just read Blankfein’s latest PR talk (Huffpo) – that our system is good at creating wealth but not good at distributing it. No kidding Lloyd. Just exactly what is our system anyway? The blatant extraction of profits? Maybe we should codify a new law that corporate arbitrage for profit is illegal. No more offshoring of jobs and factories; no more exporting back to the US from elsewhere; no more free ride to trash the environment, no more bogus claims about “productivity” and no more pointless tax breaks. Oh, yes – and no more supra national trade tribunals. Lloyd was just trying to rationalize Pope Francis… maybe we don’t achieve our ends but we mean well. No you don’t Lloyd.

    1. NotTimothyGeithner

      “just trying to rationalize Pope Francis”

      The guy didn’t even name names, and Versailles is panicking.

      Of course, the Vatican banks could always pull cash out of banks if they so chose which could cause major problems for TBTF if they so chose, and unlike bankers, the Vatican has diplomatic immunity. The Vatican survived the dissolution of the Papal states and foreign occupations of Rome.

  11. Dan Lynch

    Many post-Keynesians argue that corporate taxes are passed onto consumers like any other business cost, hence a corporate tax is a regressive tax on consumption.

    Even if that is true, it does not mean that corporate tax reductions will be passed on to consumers in the form of lower prices. More likely it will result in windfall profits that go to management and shareholders.

    One of the earliest advocates of ending corporate taxes put several qualifiers on his claim — that markets must be competitive, and that labor must have bargaining strength, otherwise eliminating corporate taxes would simply result in larger profits rather than benefiting labor and consumers.
    http://home.hiwaay.net/~becraft/RUMLTAXES.html

    1. Fiver

      Not sure that “many” post-Keynesians argue that corporate taxes are automatically passed to consumers and are “therefore regressive” as a theoretical or necessary outcome – just what happens inside a system tilted so wildly in favour of corporate pricing power.

      But also important, and I’m surprised nobody else has raised it, taxing corporate profits at reasonable rates helped keep a limit on corporate malfeasance. For instance, corporations’ securities investments are now so large as to imperil many US corporations should another large shock occur, while this Admin has showered so many favorable tax rulings on US behemoths there is enough loose cash flying around to buy the Admin and/or Congress just about every time an issue comes up just out of petty cash.

      Look at the places where corporations still have serious public responsibilities like paying taxes at a decent rate and you’ll also find the nations that outrank the US on a whole range of measures of well-being, health, education, lower levels of violence and incarceration, that sort of thing.

  12. AbyNormal

    HEAD-MONEY, n. A capitation tax, or poll-tax.

    In ancient times there lived a king
    Whose tax-collectors could not wring
    From all his subjects gold enough
    To make the royal way less rough.
    For pleasure’s highway, like the dames
    Whose premises adjoin it, claims
    Perpetual repairing. So
    The tax-collectors in a row
    Appeared before the throne to pray
    Their master to devise some way
    To swell the revenue. “So great,”
    Said they, “are the demands of state
    A tithe of all that we collect
    Will scarcely meet them. Pray reflect:
    How, if one-tenth we must resign,
    Can we exist on t’other nine?”
    The monarch asked them in reply:
    “Has it occurred to you to try
    The advantage of economy?”
    “It has,” the spokesman said: “we sold
    All of our gray garrotes of gold;
    With plated-ware we now compress
    The necks of those whom we assess.
    Plain iron forceps we employ
    To mitigate the miser’s joy
    Who hoards, with greed that never tires,
    That which your Majesty requires.”
    Deep lines of thought were seen to plow
    Their way across the royal brow.
    “Your state is desperate, no question;
    Pray favor me with a suggestion.”
    “O King of Men,” the spokesman said,
    “If you’ll impose upon each head
    A tax, the augmented revenue
    We’ll cheerfully divide with you.”
    As flashes of the sun illume
    The parted storm-cloud’s sullen gloom,
    The king smiled grimly. “I decree
    That it be so — and, not to be
    In generosity outdone,
    Declare you, each and every one,
    Exempted from the operation
    Of this new law of capitation.
    But lest the people censure me
    Because they’re bound and you are free,
    ‘Twere well some clever scheme were laid
    By you this poll-tax to evade.
    I’ll leave you now while you confer
    With my most trusted minister.”
    The monarch from the throne-room walked
    And straightway in among them stalked
    A silent man, with brow concealed,
    Bare-armed — his gleaming axe revealed!
    G.J. / Devils Dic.

  13. A. Wells

    Since employee related expenses are business expenses, therefore not a part of the profit, exactly how would lower taxes translate into more employment? In other words, unless one believes that business would hire an employee instead of pocketing profit, the argument that lower taxes translate to more employment makes no sense in the first place. For those who would argue otherwise, Wilshire 5000 EPS (WLX)is highest in 10 years, so the employment should be there as well. Is it?

  14. Synoia

    We know this.

    Increased demand for a compnay increses employment. Mamagement will hire when their currect worker cannot produce or cannot sell fast enough to meet customer demand.

    1. neo-realist

      I sense that what happens in many cases nowadays is that when more business/work/customer demand comes than than the present employees can handle, the company hires a temp or temps to help them through the heavy period rather than hire more permanents–no bennies or normal recourse in response to unfair or bad treatment like the permanents–then they are easily kicked to the curb when work settles to the mean.

      In some other cases, rather than hire more employees when the work increases, the corporation will come up with schemes to “enhance” worker productivity to forestall new hires. Sometimes the enhancement takes the form of nothing more than meetings notifying them of their lack of productivity, making simplistic suggestions to be more productive and getting written up for lack of productivity which may or may not lead to dismissal.

  15. Thisson

    This study seems to be asking the wrong question: does changing a company’s taxes affect the number of employees that it hires. This is the wrong question because it does not assess whether jobs are created outside of the taxpaying companies by new companies entering industry as competitors to get a share of the increased profits available due to lower taxation.

    Here’s the idea: if you lower corporate taxes you are making corporations more profitable. This will attract more companies into the market. This is where the jobs would be expected. Is there a study that looks at this source for jobs? That is what I would be interested in.

    1. Yves Smith Post author

      Did you actually read the piece?

      1. It is on the mark because it is debunking arguments made by corporations in favor of having their tax bills cut

      2. You are basically discussing new entrants. Those are small businesses which can escape taxation at the entity level by electing to be an S corp or setting themselves up as a partnership or limited liability corporation.

      So that problem is ALREADY solved in the current tax code and has nada to do with the tax issue under discussion.

      1. Fiver

        Maybe he’s talking at the global level re “new entrants” into an economy, with juridicstions at all levels lowering tax levels and generally showering corporate goodies to “compete”, to “get that plant” and so on..

        I’d say what happened with Ireland is the best argument going against using ultra-low corporate taxes and other corporate freebies around which to build an enduring economy. Perhaps it it was hard for Ireland to see heading into a Bubble at Warp 5 that the cost advantage had already shifted to jurisdictions even more eager to serve global corporations’ insatiable appetite for low-priced loot, and their dilemma is shared by huge swaths of Europe and the Americas. The logical outcome of corporate globalization will see the impoverishment of the great bulk of mankind.

      2. Steve Roberts

        FYI: A limited liability company doesn’t have a specific tax designation. An LLC chooses how they are taxed. So the argument is that someone dumb enough to start their company as a C-corp should be punished with a higher tax rate than someone who starts their company as an LLC and chooses to be taxed as a partnership? I’m sorry but that makes absolutely zero sense.

        Employers don’t hire based upon profit, they hire and fire based upon demand.

        When you are competing in an international market place, cost is certainly a factor in the placing of factories and offices.

  16. Conscience of a Conservative

    Companies don’t exist to creat jobs, but to make money, so arguments about job creation need to be taken with a grain of salt, however I still feel that when a company has a choice about where to open a plant, site, etc they look at the costs, and taxes are certainly one aspect of that.

    1. F. Beard

      True, so let’s tax them up front – by removing from them all explicit and implicit subsidies such as a government-backed counterfeiting cartel that they use to steal their workers’ and the general population’s purchasing power.

      Also if the common stock of all large corporations was redistributed equally to the population that should not affect the operations of those corporations a bit but it would make the population less dependent on corporate jobs.

    2. Yves Smith Post author

      That is your belief. Equity is a residual claim, and in incorporating, a businessman commits to meeting a long list of more senior obligations first.

      In Japan, the purpose for starting a business is considered to be to create employment.

  17. rps

    I ask myself how a cabal of corporations came into the world so exalted above the rest, and distinguished like some new species of Kings, is worth enquiring into, and whether they are the means of happiness or of misery to the hard working citizens of this country.

    Lower corporate tax rates are the tip of the iceberg of freebies. Gov. Pat Quinn is busily demonizing Illinois pensions and pensioners and demanding austerity in spite of the fact of his and the Illinois legislaturers disregard of meeting the state’s legal obligation to fund these same pension over the years. And in turn, Quinn and his political buds gave away state freebies like the eager mall santas busily handing out candy canes on xmas eve to the kiddies.

    As an example of Quinn’s corporate generosity lets sneak a peek of the gift that keeps on giving to Motorola. Let’s first remember that poor welfare queen Motorola Mobility’s federal and state income tax liability represented less than 1 percent of its revenue in 2010. Alas, welfare queen Motorola snagged a deal beginning in 2011. Under the legislation signed by Quinn -Motorola has the option to use the credits against withheld employee income tax liability. In essence, the company can retain state employee income tax withholdings. That’s a nice little present of $10 million buckaroos per year for the next 10 years adding up to $100 million in their xmas stockings. Not enough you say?, Well heck how about another $1.25 million in job-training funds and a $3 million large-business development grant to assist with capital expenses. Motorola’s contract responsibility is to maintain a workforce of 2500 of the 3290 employees they had. Makes you wonder what there employee budget looks like for 2500 employees? $10 million per year in salaries? I don’t think so. The legislation Quinn signed also applies to other companies including Navistar, cable TV, wireless telecommunications and computing fields, as well as to makers of inner tubes and tires. Navistar’s sweet deal allows them to fire up to 25 percent of their workforce and still get millions from the state” by holding onto the income taxes of employees. The sweet deal legislation is Public Act 97-2 – Economic Development for a Growing Economy, or EDGE, program run by the Illinois Department of Commerce and Economic Opportunity, IDCEO

    Instead of paying for police, teachers, roads and other state and local services that grease the wheels of commerce, Illinois workers at these companies subsidize their employers with the state income taxes they pay.

  18. David Horst

    Another reason that corporate taxation is not double taxation is that corporations as entities are heavy users of government services. They utilize the infrastructure, rely on various regulators, the fed, police, customs, schools, and much more. In addition, they often benefit from access to common resources like broadcast band, mineral rights, water, sewer, air, etc. By comparison, the needs of individuals are simple.

    1. Steve Roberts

      The needs of the individual are simple?

      If companies are so burdensome on the world, why do we allow partnerships to avoid taxation of profits completely?

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