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OpEdNews Op Eds    H2'ed 10/14/17

On Corporate Tax Reduction

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Message Seymour Patterson

U.S. companies have approximately $2.5 trillion stashed in financial institutions abroad. This is a substantial amount of money. Put in perspective, this sum represents about 14 percent of GDP (2016); it is about the size of the GDP of California, which in 2016 was $2.8 trillion; if it were divvied up, each American would receive $76,923; or $5 billion would go to the top 500 U.S. companies. These companies have parked those dollars overseas allegedly to avoid onerous taxes at home.

The U.S. has the highest marginal tax rate on business. It follows that if U.S. businesses are leaving profits overseas because of high business taxes, then the solution to this problem is to lower the business tax, and make it more competitive with countries where some American business seek safe haven for profits. There is, however, a problem: American companies don't pay the highest statutory corporate tax rate, which currently is 39.1 percent. In fact, they pay an effective rate of 18.6 percent. The effective rate is comparable to corporate tax rates on business in other countries that compete with the U.S. For example, in 2012, Argentina's effective tax rate was 22.6 percent, Japan's was 21.7 percent, the U.K.'s was 18.7 percent. (See CBO) The effective tax rate for a corporation is the average rate at which its pre-tax profits are taxed." (Definition from Investopedia)

In 2009, President Obama aimed to jumpstart the economy with $787 billion in spending. In some quarters, it is debatable whether his effort had any positive effect on the economy. Nevertheless, assume about $1 trillion could turn around an ailing economy, then $2.5 trillion would have a greater multiplier effect. The problem is that the U.S. economy is currently operating in the neighborhood of full employment and a huge infusion of cash in the economy could create bottlenecks and cause prices to rise--i.e. produce inflationary pressures in the economy.

Yet, everyone might agree that bringing those dollars to the U.S. economy is a positive thing. But not everyone will agree that those funds in the U.S. economy would translate into higher economic growth in an economy that has been flirting with three percent growth an unemployment bordering on full employment.

How can companies be induced to bring $2.5 trillion home to the U.S.? One proposal that seems to be gaining currency is tax reform. The Trump administration presumes tax reform that reduces the corporate tax rate to 20 percent will induce companies to repatriate over two trillion dollars to the U.S. If the effective tax rate is 18 percent on American companies, a two points higher rate of 20 percent does not meet a magnitude that makes a difference in corporate investment decisions. Further, the corporate tax rate cut deficit would be made up from the 3.8 percent Obamacare tax from the ACA's repeal. See Whitehouse) About thirty million Americans would be without insurance as a result of Obamacare repeal and replace. Be that as it may, what is likely to happen is that with a fifteen percent corporate tax rate, the rich would buy more yacht, more summer homes in The Hamptons, more Lamborghinis, private jets, islands, etc. There will certainly be more jobs for few people in the high-end market for products favored by the wealthy. But there is unlikely to be the kind of job creation that is the by-product of mass consumption goods like Chevys and Fords, cell phones, tablets, computers, etc.

Yet, there might be demand-pull type inflationary pressures on the economy from the infusion of $2.5 trillion in potential spending. Fortuitously, the might be Federal Reserve Bank would tamp down any evidence of inflation by restricting the growth of the money supply. Already, in response to the good economic numbers, including the record-breaking stock market performance, and rising consumer confidence, the Federal Reserve Bank has decided to leave the benchmark interest rate unchanged.

However, what is a preferred policy going forward is one that dissuades companies from not bringing their profits home at the outset. First, policies that increase the after-tax profits of business could lead to fewer investments rather than more. Repealing the estate tax, the corporate pass-through, the alternative minimum tax, and lowering the corporate tax rate might not lead to more investment, employment and economic growth. The lion's share of the payoffs from the proposed tax reform will accrue to people with higher incomes--namely, the rich. They have no for incentives to spend more, pay higher wages, or otherwise investment more. They do not need tax reform to do any are all these things.

There might be a difference between the proclivities of the rich and the poor with regard to the disposition of marginal income. The rich might save it. A good thing in the face of slow economic growth like in a recession. The savings can be borrowed and spent as business and public investments. The unemployment rate is 4.2 percent, which indicates full employment. Wages have ticked up a little bit. Consumer confidence is on the rise. And the stock market continues to break records. All these indices point to a good U.S. economy. And in this environment, repatriating $2.5 trillions dollars could contribute nothing to the U.S. economy. If demand were to rise with successful repatriation of $2.5 trillion, inflationary pressures could be unleashed on the U.S. economy without a real increase in output.

A more productive way to constrain the flight of capital--that employs revisions in the tax code--recognizes the incentives of a rational choice between paying taxes to the government versus investing in one's own company. That binary choice is possible when the tax rate is higher. Given the assumption that tax cuts lead to more investment, raising taxes to achieve the same goal is counterintuitive. If the tax rate is high, say seventy percent, a businessperson has the choice of paying that to the government, or reinvesting it in her own business as new capital investment or higher wages for her workers. For example, higher wages would appear on the corporate income statement as an expense to be deducted from income (sales) to yield lower before tax profits.

 

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Seymour Patterson received a Ph.D. in economics from the University of Oklahoma in 1980. He has taught courses and done research in international economics and economic development. He has been the recipient of two Fulbright awards--the first in (more...)
 
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