Summary  

The public has supported raising taxes on the ultrarich and corporations for years, but policymakers have not responded. Small increases in taxes on the rich that were instituted during times of Democratic control of Congress and the White House have been consistently swamped by larger tax cuts passed during times of Republican control. This was most recently reflected in the massive budget reconciliation bill pushed through Congress exclusively by Republicans and signed by President Trump. This bill extended the large tax cuts first passed by Trump in 2017 alongside huge new cuts in public spending. This one-step-forward, two-steps-back dynamic has led to large shortfalls of federal revenue relative to both existing and needed public spending.

Raising taxes on the ultrarich and corporations is necessary for both economic and political reasons. Economically, preserving and expanding needed social insurance and public investments will require more revenue. Politically, targeting the ultrarich and corporations as sources of the first tranche of this needed new revenue can restore faith in the broader public that policymakers can force the rich and powerful to make a fair contribution. Once the public has more faith in the overall fairness of the tax system, future debates about taxes can happen on much more constructive ground.

Policymakers should adopt the following measures:

• Tax wealth (or the income derived from wealth) at rates closer to those applied to labor earnings. One way to do this is to impose a wealth tax on the top 0.1% of wealthy households.
• Restore effective taxation of large wealth dynasties. One way to do this would be to convert the estate tax to a progressive inheritance tax.
• Impose a high-income surtax on millionaires.
• Raise the top marginal income tax rate back to pre-2017 levels.
• Close tax loopholes for the ultrarich and corporations.

Introduction

The debate over taxation in the U.S. is in an unhealthy state. The public is deeply distrustful of policymakers and doesn’t believe that they will ever put typical families’ interests over those of the rich and powerful. In tax policy debates, this means that people are often highly skeptical of any proposed tax increases, even when they are told it will affect only (or, at least, overwhelmingly) the very rich. People are also so hungry to see any benefit at all, no matter how small, that they are often willing to allow huge tax cuts for the ultrarich in tax cut packages if those packages include any benefit to them as well. The result has been a continued downward ratchet of tax rates across the income distribution.1 This is a terrible political dynamic for U.S. economic policy, given the pressing national needs for more revenue.

As countries get richer and older, the need for a larger public sector naturally grows.2 Yet the share of national income collected in taxes by the U.S. government has stagnated since the late 1970s. This has left both revenue and public spending in the United States at levels far below those of advanced country peers.3 This stifling of resources available for the public sector is not only inefficient but has led to frustration over its inability to perform basic functions. The political root of this suppression of resources for the public sector is a series of successful Republican pushes to lower tax rates for the richest households and corporations. This attempt to use tax policy to increase inequality has amplified other policy efforts that have increased inequality in pre-tax incomes, leading to suppressed growth in incomes and declining living standards for low- and middle-income households and a degraded public sector.4

In recent decades the dominant strategy for many on the center–left to combat the public’s tax skepticism is to pair tax increases with spending increases for programs that lawmakers hope will be popular enough to justify the taxes. This strategy has worked in the sense that some tax increases have been passed in the same legislation that paid for valuable expansions of income support, social insurance, and public investment programs in recent years. But this strategy has not stopped the damaging political dynamic leading to the sustained downward ratchet of tax revenue and the tax rates granted to the ultrarich and corporations.5

Part of the problem with a strategy of trying to attach tax increases to allegedly more popular spending increases is that it takes time for spending programs to become popular. The Affordable Care Act (ACA), for example, was not particularly popular in the year of its passage but has survived numerous efforts to dislodge it and has seemingly become more popular over time. Conversely, the expanded Child Tax Credit (CTC) that was in effect in 2021 and cut child poverty in half only lasted a single year, so there was little organic public pressure on Congress to ensure it continued.

In this report, we suggest another strategy for policymakers looking to build confidence in the broader public that tax policy can be made fairer: Target stand-alone tax increases unambiguously focused on ultrarich households and corporations as the first priority of fiscal policy. The revenue raised from this set of confidence-building measures can be explicitly aimed at closing the nation’s fiscal gap (the combination of tax increases or spending cuts needed to stabilize the ratio of public debt to national income).6 Once this gap has been closed with just highly progressive taxes, the public debate about the taxes needed to support valuable public investments and welfare state expansions should be on much more fruitful ground.

This approach takes seriously the work of scholars like Williamson (2017), who argue that the U.S. public is not rigidly “anti-tax.” Indeed, this public often views taxpaying as a civic responsibility and moral virtue. Yet they have become convinced that too many of their fellow citizens are not making a fair and adequate contribution. Part of this perception rests on underestimating the taxes paid by the poor and working people, but a good part of this perception also rests on the accurate impression that many rich households and corporations are not paying their fair share. Policy can change this latter perception, particularly if the policy is explicitly identified with ensuring that the rich and corporations—and only the rich and corporations—will see their taxes increase.

The rest of this report describes a number of tax policy changes that would raise revenue from the rich and corporations with extremely small (often zero) spillover into higher taxes for anybody else. It also provides rough revenue estimates of how much each could raise. It is not exhaustive, but it demonstrates that the nation’s current fiscal gap could certainly be closed with only taxes on the very rich. Making this policy agenda and target explicit could go a long way to restoring trust and improving the quality of the debate about taxes.

Targeting the ultrarich

The vast majority (often 100%) of the tax policy changes discussed below would only affect the taxes paid by the top 1% or above (those making well over $563,000 in adjusted gross income in 2024). Many of the taxes—and the vast majority of the revenue raised—will actually come from households earning well above this amount. We will be more specific about the incidence of each tax in the detailed descriptions below. The tax policy changes fall into two categories: increasing the tax rates the rich and ultrarich pay and closing the tax loopholes they disproportionately benefit from. We first present the tax rate changes, and we list them in declining order of progressivity.

Both the rate changes and the loophole closers disproportionately focus on income derived from wealth. By far the biggest reason why rich households’ tax contributions are smaller than many Americans think is appropriate has to do with rich households’ source of income. So much of these households’ income derives from wealth, and the U.S. federal tax system taxes income derived from wealth more lightly than income derived from work. If policymakers are unwilling to raise taxes on income derived from wealth, the tax system can never be made as fair as it needs to be.

Levying a wealth tax on the top 0.1% or above of wealthy households

The WhyNot Initiative (WNI) on behalf of Tax the Greedy Billionaires (TGB) has proposed a wealth tax of 5% on wealth over $50 million, with rates rising smoothly until they hit 10% at $250 million in wealth and then plateauing. With this much wealth, even a household making just a 1% return on their wealth holdings would receive an income that would put them in the top 1% of the income distribution. A more realistic rate of return (say, closer to 7%) would have them in the top 0.1% of income.

The $50 million threshold roughly hits at the top 0.1% of net worth among U.S. families, so this tax is, by construction, extremely progressive—only those universally acknowledged as extremely wealthy would pay a penny in additional tax. The WNI proposal also imposes a steep exit tax, should anybody subject to the tax attempt to renounce their U.S. citizenship to avoid paying it.

The Tax Policy Center (TPC) has estimated that the WNI wealth tax could raise $6.8 trillion in additional net revenue over the next decade, an average of $680 billion annually. In their estimate, the TPC has accounted for evasion attempts and the “externality” of reduced taxes likely to be collected on income flows stemming from wealth holdings. Despite accounting for these considerations, the $6.8 trillion in revenue over the next decade could completely close the nation’s current estimated fiscal gap.

A key consideration in the long-run sustainability of revenue collected through a wealth tax is how quickly the tax itself leads to a decline in wealth for those above the thresholds of the tax. If, for example, the tax rate itself exceeded the gross rate of return to wealth, wealth stocks above the thresholds set by the tax would begin shrinking, and there would be less wealth to tax over time. The Tax Policy Center’s estimate includes a simulation of this decumulation process, assuming an 8.5% rate of return.7 It finds only very slow rates of decumulation.

Other simulation results (like those in Saez and Zucman 2019b) find faster decumulation for wealth taxes as high as this, but even their findings would still support the significant revenue potential of a wealth tax targeted at sustainability. Whereas the WNI wealth tax raises roughly 2.2% of GDP over the next 10 years, the Saez and Zucman (2019a) results highlight that over half this much could essentially be raised in perpetuity.8

It is important to note that even if revenue raised from any given wealth tax came in lower than expected due to the decumulation of wealth, this decumulation is itself highly socially desirable. The wealth would not be extinguished. It would instead accumulate to other households throughout society. An analogy is carbon taxes targeted at lowering greenhouse gas emissions. If a carbon tax were implemented and the revenue it raised steadily fell over time, this would be a sign of success, as the primary virtue of such a tax is not the long-run revenue it can raise but the behavioral changes it can spur, such as switching to less carbon-intensive forms of energy generation and use.

The benefits from wealth decumulation could be profound. For one, much of the rise in wealth in recent decades has been the result of a zero-sum transfer of income claims away from workers and toward capital owners (Greenwald, Lettau, and Ludvigson 2025). To the degree that higher wealth taxes make these zero-sum transfers less desirable for privileged economic actors, the imperative to keep wages suppressed and profits higher will be sapped, leading to a broader distribution of the gains of economic growth.

Further, highly concentrated wealth leads naturally to highly concentrated political power, eroding the ability of typical families to have their voices heard in important political debates (Page, Bartels, and Seawright 2013). Studies show that popular support for democratic forms of government is weaker in more unequal societies, demonstrating that a greater concentration of wealth can lead to the erosion of democracy (Rau and Stokes 2024).

Converting the estate tax to a progressive inheritance tax

The estate tax in the United States currently only applies to estates of more than $11.4 million. At the end of 2025 it would have reverted to pre-2017 levels of roughly $7 million, but the Republican budget reconciliation bill passed in 2025 will raise it to a level more than twice as high starting in 2026—at $15 million. The 40% estate tax rate applies on values above these thresholds.

The estate tax threshold has been increased significantly since 2000, with changes in 2001, 2012, 2017, and 2025 all providing large increases. In 2000 the threshold for exemption was under $1 million, and the rate was 55%. If the 2000 threshold were simply updated for inflation, it would have been $1.3 million today, instead of $11.4 million. At this $1.3 million threshold and with a 55% rate, the estate tax would raise roughly $75 billion more in revenue this year than it is currently projected to.9 In short, our commitment to taxing wealthy estates and their heirs has eroded substantially in recent decades.

Batchelder (2020) proposes a new tax on inheritances that would replace the estate tax. Batchelder’s inheritance tax would not fall on the total value of the estate, but simply the portion of it inherited by individual heirs. Her proposal is to tax inheritances of various thresholds as ordinary income. Because the tax would be triggered by the lifetime level of gifts and inheritances, it cannot be avoided just by using estate planning to time these bequests and gifts. For a threshold of $1 million, the tax would raise roughly 0.35% of gross domestic product annually, or roughly $1 trillion over the next decade.

An inheritance tax is naturally more progressive than an estate tax. To see why, imagine an estate of $5 million that faced 2000-era estate tax rules. An estate tax would lower the value of the inheritance to all heirs by an amount proportional to the tax. Conversely, under an inheritance tax, the effective rate of the tax felt by heirs would be significantly different if the estate was spread among 10 heirs (each receiving $500,000 and, hence, not even being subject to the Batchelder inheritance tax that starts at $1 million) versus being spread among two heirs (each receiving $2.5 million and paying an inheritance tax). Fewer heirs for a given estate value imply a larger inheritance and, hence, a higher inheritance tax (if the inheritance exceeds the tax’s threshold).

Imposing a high-income surtax on millionaires

Probably the most straightforward way to tightly target a tax on a small slice of the richest taxpayers is to impose a high-income surtax. A surtax is simply an across-the-board levy on all types of income (ordinary income, business income, dividends, and capital gains) above a certain threshold. As such, there is zero possibility that lower-income taxpayers could inadvertently face any additional tax obligation because of it.

A version of such a high-income surtax was actually a key proposed financing source for early legislative versions of the Affordable Care Act. The bill that passed the House of Representatives included such a surtax.10 This surtax was replaced with other revenue sources during the reconciliation process between the House and Senate versions.

One proposal is to enact a 10% surtax on incomes over $1 million. This would affect well under 1% of households (closer to 0.5%). Using data from the Statistics of Income (SOI) of the Internal Revenue Service (IRS), we find that roughly $1.55 trillion in adjusted gross income sat over this $1 million threshold among U.S. households in 2019.11 A purely static estimate with no behavioral effects, hence, would argue that $155 billion annually (10% of this $1.55 trillion) could be raised from this surcharge. In tax scoring models (like that of the Tax Policy Center or the Joint Committee on Taxation), behavioral effects tend to reduce estimates roughly 25% below such static estimates. Applying such a discount would still suggest that the revenue potential of a high-income surtax with a $1 million threshold could be $1.5 trillion over the next decade.

Raising the top marginal income tax rate back to pre-TCJA levels

During the Clinton and Obama administrations, the top marginal tax rate on ordinary income was increased to 39.6%. During the George W. Bush and the first Donald Trump administrations, it was reduced and currently sits at 37%. This lower marginal top rate would have expired at the end of 2025, but the Republican budget reconciliation bill, passed by Congress and signed by Trump in July 2025, ensured that it would stay at 37%.

In 2025 the bracket that this top tax rate applies to will begin at $626,350 for single filers and joint filers. This is well under 1% of taxpayers. If the bracket for top tax rates was dropped to $400,000 and the rate was raised to 39.6%, the Tax Policy Center has estimated that this could raise roughly $360 billion over the next decade. Earlier in 2025, there were reports that Republicans in Congress were thinking about letting the top tax rate revert to the level it was at before the 2017 Tax Cuts and Jobs Act (TCJA). This was touted as members of Congress breaking with their party’s orthodoxy and actually taxing the rich. On the contrary, the new top marginal tax rate now applies to joint filers at an even lower level than pre-TCJA rates.

As can be seen in Table 1, pushing the top marginal rate on ordinary income to pre-TCJA levels is one of the weakest tools we have for raising revenue from the rich. The reason is simple. A large majority of the income of the rich is not ordinary income; it is income derived from capital and wealth, and, hence, only changing the tax rate on ordinary income leaves this dominant income form of the rich untouched.

Corporate tax rate increases

In 2017 the TCJA lowered the top rate in the corporate income tax from 35% to 21%, and the 2025 Republican budget reconciliation bill extended that lower 21% rate. The 35% statutory rate that existed pre-TCJA was far higher than the effective rate actually paid by corporations. Significant loopholes in the corporate tax code allowed even highly profitable companies to pay far less than the 35% statutory rate.

But at the same time the TCJA lowered the statutory rate, it did little to reduce loopholes—the gap between effective and statutory rates after the TCJA’s passage remains very large.12 Clausing and Sarin (2023) have estimated that each 1 percentage point increase in the top statutory tax rate faced by corporations raises over $15 billion in the first years of the 10-year budget window. Raising today’s 21% top rate back to the 35% rate that prevailed before the TCJA would, hence, raise roughly $2.6 trillion over the next decade.

The immediate legal incidence of corporate taxes falls on corporations, the legal entities responsible for paying the taxes. However, the economic incidence is subject to more debate. The current majority opinion of tax policy experts and official scorekeepers like the Joint Tax Committee (JTC) is that owners of corporations (who skew toward the very wealthy) bear most of the burden of corporate tax changes.13 But some small share of the corporate tax rate’s incidence is often assigned to workers’ wages, as there are some (speculative) reasons to think a higher corporate tax rate leads in the long run to lower wage income. The economic reasoning is that if the higher corporate tax rates lead to less economywide investment in tangible structures, equipment, and intellectual property, then this could slow economywide productivity growth. This slower productivity growth could, in turn, reduce wage growth for workers.

However, newer research highlights that there are good reasons to think that corporate tax rate increases have zero—or even positive—effects on private investment in structures, equipment, and intellectual property. Brun, Gonzalez, and Montecino (2025, forthcoming) argue that once one accounts for market power (either in product or labor markets) of corporations, corporate taxes fall, in part, on nonreproducible monopoly rents. To provide an example, a large share of Amazon’s profits is not just due to the size of the firm’s capital stock but its considerable monopoly power in many business segments. This market power allows them to charge higher prices than they could in competitive markets, and these excess prices represent a pure zero-sum transfer from consumers, not a normal return to investment.

Increasing taxes on these monopoly rents can reduce stock market valuations of firms and actually lower the hurdle rate for potential competitors assessing whether to make investments in productivity-enhancing capital. This can actually boost investment and productivity economywide, and if investment and productivity rise (or just do not fall) in response to corporate tax increases, this implies that none of the economic incidence of a corporate tax increase falls on anybody but the owners of corporations.

In short, despite some mild controversy, it seems very safe to assume that increases in the corporate income tax rate both are and would be perceived by the public as extremely progressive.

Closing tax loopholes that the ultrarich and corporations use

As noted above, it’s not just falling tax rates that have led to revenue stagnation in recent decades. There has also been an erosion of tax bases. Growing loopholes and increasingly aggressive tax evasion strategies have put more and more income out of the reach of revenue collectors. It goes almost without saying that the vast majority of revenue escaping through these loopholes and aggressive tax evasion strategies constitutes the income of the very rich and corporations.

These types of loopholes are unavailable to typical working families because their incomes are reported to the Internal Revenue Service. Typical working families rely on wage income, which is reported to the penny to the IRS, and families pay their legally obligated tax amount. Income forms earned by the ultrarich, however, often have very spotty IRS reporting requirements, and this aids in the evasion and reclassification of income flows to ensure the ultrarich are taxed at the lowest rates.14 Shoring up tax bases by closing loopholes and engaging in more robust enforcement are key priorities for ensuring the very rich pay a fair and substantial contribution to the nation’s revenue needs.

Closing loopholes that allow wealth gains and transfers between generations to escape taxation

The wealthy use a number of strategies to escape taxation of the income they generate and to allow assets to be transferred to their heirs. Below we discuss three such strategies and provide a score for a consolidated package of reforms aimed at stopping this class of tax strategies—$340 billion over the next decade.

Ending the step-up in basis upon death or transfer of assets

This is best explained with an example. Say that somebody bought shares of a corporation’s stock in the early 1980s for $1 per share. They held onto it for decades until it reached $501 per share. Since they never realized this capital gain by selling the stock, they were never taxed on their growing wealth. Now, say that they transferred these stock holdings to their children decades later. Because it is no longer the original buyer’s property, it would not be assessed as part of an estate subject to the estate tax. If their children subsequently sold the stock, current law would allow a step-up in basis, which means the capital gain they earned from selling the stock would only be taxed on the gain over and above the $501 per share price that prevailed when they received the stock, not the original $1 per share price.

So, if children sold their stock gift for $501 per share, they would owe zero tax. And for the family as a whole, the entire (enormous) capital gain that occurred when the share appreciated from $1 to $501 is never taxed. This allows huge amounts of wealth to be passed down through families without the dynasty’s ever paying appropriate taxes, either capital gains taxes or estate taxes.

An obvious solution to this problem is simply to not grant the step-up in basis when the asset is transferred. That is, when the children receive the stock in the example above, any subsequent sale should be taxed on any capital gain calculated from the $1 originally paid for the stock. In the case above, the children would have had to pay a capital gains tax on the full value between $1 and $501 if they had sold the stock for $501.

Besides raising money directly through larger capital gains values, ending the step-up in basis can also cut down on many tax engineering strategies that wealthy families undertake to avoid taxation. Estimates for the revenue that could be raised by enacting this change are quite varied, but they tend to sit between $15 billion and $60 billion in 2025.15 We estimate this would raise $190 billion over the next decade.

An alternative solution getting at the same problem would be to make the death of a wealth holder a realizable event. Essentially, for the purposes of taxation, it would be assumed that all assets were sold by a wealth holder upon their death, and the appropriate rate of capital gains taxation would then be collected.

Making borrowing a realizable event

A related reform would make the pledging of any asset as collateral against a loan a realizable event. In the example above, as the original holder of the stock held the shares and did not sell them over a long period of time, this raises an obvious question of how this family is financing their current consumption without liquidating any wealth. They could, of course, be earning labor income. But the very wealthy often finance current consumption by taking out loans and using the value of their wealth as collateral. So long as the interest rates on the loans are lower than the rate of return on the wealth being pledged as collateral, they can enjoy high and rising consumption and still see considerable wealth appreciation. This is a particularly useful strategy during periods of low interest rates (like most of the past 25 years) and for owners of newer corporations that are growing rapidly (think Jeff Bezos and Amazon during the 2000s). This use of debt as a strategy of avoiding capital gains realization has often been called the “Buy, Borrow, Die” strategy.

An obvious reform to stop this would be to force wealth holders to treat pledging an asset as collateral as a realization event for this asset. When the wealth holder goes to financiers to get loans and pledges their shares as collateral, the wealth holder would pay a capital gains tax on the difference in the value of the stock between when they originally bought it and the value the day it is pledged for collateral. The amount of revenue this would raise would be small in the grand scheme of the federal budget, roughly $60 billion over the next decade. But it would provide one more block to a common tax evasion strategy for the ultrarich, and this could show up in more revenue collected through other taxes.

Closing loopholes that erode estate or inheritance tax bases

Hemel and Lord (2021) identify estate planning mechanisms that reduce the base of the current estates taxes, including the abuse of grantor retained annuity trusts (GRATs) and excessively preferential tax treatment of transfers within family-controlled entities. Under current law, wealthy individuals establishing a trust for their descendants may calculate the taxable gift amount of the trust by subtracting the value of any qualified interest. This qualified interest includes any term annuity retained by the grantor of the trust. The annuity is based on market interest rates prevailing when the trust was established. When interest rates are low, this becomes an extremely valuable deduction.

Hemel and Lord (2021) give the example of a grantor establishing a $100 billion trust but retaining a two-year annuity payment of $50.9 million based on the 1.2% interest rate prevailing in 2021. This taxpayer would be able to subtract this annuity from their taxable gift calculation, effectively paying no gift tax. If the assets in the trust grew faster than 1.2%, then the trust would have assets left over after two years, and these could be passed to the beneficiaries free of any transfer tax (as these assets came from the trust, not the original grantor). If assets in the trust grew more slowly than this amount, then the trust would be unable to make its full final annuity payment and would be declared a failed trust and would trigger no estate or gift tax consequences. In this case, the original grantor could simply try again to construct a short-term irrevocable trust that would succeed in transferring income to heirs without triggering a gift tax.

Hemel and Lord (2021) recommend repealing the law that allows for this deduction of qualified interest from gift or transfer taxes applying to GRATs. They also argue for reducing the preferential treatment of transfers within family-controlled entities. The full package of reforms to estate planning that they recommend would raise $90 billion over the next decade.

Closing the loophole from ambiguity between self-employment and net investment income

As part of the Affordable Care Act, a 3.8% tax was assessed on income above $200,000 (for single filers and $250,000 for joint filers). If this income is earned as wages or self-employment income, this tax is paid through the Federal Insurance Contributions Act (FICA) or the Self-Employment Contributions Act (SECA) taxes. If the income is received as a dividend or interest payment or royalty or other form of investment income, the tax is paid as a Net Investment Income Tax (NIIT). The clear intent is for income of all forms to be assessed this tax.

Somehow, however, some business owners (mostly those owning limited partnerships and S corporations—corporations with a limited number of shareholders who are required to pass through all profits immediately to owners) have managed to classify their income as not subject to FICA, SECA, or the NIIT.16 A number of policy options could close this unintended gap and raise nontrivial amounts of revenue—roughly $25 billion in 2025. Importantly, the revenue collected by this loophole closing would go directly to the Medicare trust fund.

International corporate tax reform

Before the TCJA, the biggest loophole by far in the corporate income tax code was U.S. corporations’ ability to defer taxes paid on profits earned outside the United States. In theory, once these profits were repatriated, taxes would be levied on them. However, financial engineering meant that there was little need to repatriate these profits for reasons of undertaking investment or stock buybacks or anything else corporations wanted to do.17 Further, corporations routinely lobbied for repatriation holidays, periods of time when they were allowed to repatriate profits at a reduced rate. One such holiday was passed by Congress and signed into law by George W. Bush in 2004.

Between 2004 and 2017, pressure for another such holiday ramped up as more and more firms deferred corporate taxes by holding profits offshore. The TCJA not only provided such a holiday for past profits kept offshore, it also made profits booked overseas mostly exempt from U.S. corporate taxes going forward. In essence, the TCJA turned deferral into an exemption.

This TCJA exemption of foreign-booked profits was subject to small bits of tax base protection. But they have been largely ineffective. The 2025 budget reconciliation bill would further exacerbate these problems, reducing taxes on foreign income even more.

Clausing and Sarin (2023) recommend a suite of corporate reforms that aims to level the playing field between firms booking profits in the United States versus overseas. Key among them would be to reform the Global Intangible Low-Taxed Income (GILTI) tax rate, a rate introduced in the TCJA, to ensure that financial engineering would not allow large amounts of corporate income earned by U.S.-based multinationals to appear as if they were earned in tax havens.18

The GILTI is essentially a global minimum tax rate for U.S. multinationals. But the rate (10.5% in 2024 and 12.6% in 2025) is far too low to effectively stop this kind of tax haven-shopping for corporations, much lower than the 15% minimum rate negotiated by the OECD and agreed to by the Biden administration in 2022.

In addition, multinationals are currently allowed to blend all their foreign tax obligations globally and take credits for foreign corporate income taxes paid. So, taxes paid on a company’s actual manufacturing plant in, say, Canada, can count toward the GILTI contribution of a multinational, even if they then used financial engineering to shift most of their paper profits to tax havens like the Cayman Islands.

Raising the GILTI rate and applying it on a country-by-country basis would go a long way to preserving the base of the U.S. corporate income tax in the face of tax havens. The Clausing and Sarin (2023) suite of reforms would raise $42 billion in 2025.

Building up IRS enforcement capabilities and mandates

In 2022, the IRS estimated that the tax gap (the dollar value of taxes legally owed but not paid in that year) exceeded $600 billion. The richest households account for the large majority of this gap. The IRS in recent decades has lacked both the resources and the political support to properly enforce the nation’s tax laws and collect the revenue the richest households owe the country.

Due to this lack of resources and mandates, the IRS instead often took the perverse approach of leveraging enforcement against easy cases—easy both in terms of not taking much capacity and of not generating intense congressional backlash.19 In practice, this meant intensively auditing recipients of refundable tax credits to look for improper payments. Tax credits are refundable when the amount of a credit (say, the Child Tax Credit) is larger than the taxpayer’s entire income tax liability. In this case, the credit does not just reduce income tax liability; it will also result in an outright payment (hence, refundable) to the taxpayer claiming it. Recipients of these refundable tax credits are, by definition, low-income taxpayers—those with low income tax liability. Besides making the lives of these low-income households more anxious, these audits also just failed to generate much revenue—again, because the group being audited was generally low income and didn’t owe significant taxes in the first place.

The Biden administration included significant new money to boost IRS enforcement capacity as part of the 2022 Inflation Reduction Act (IRA). This extra enforcement capacity was paired with new mandates to reduce the tax gap by increasing enforcement efforts on rich taxpayers.

However, the IRA additions to IRS resources were already being chiseled away before the 2024 presidential election. The Trump administration clearly has no interest in whether or not the IRS consistently enforces revenue collection from the rich. The budget reconciliation bill that Republicans passed through Congress in July rolled back the expanded funding for IRS enforcement. Trump’s proposed fiscal year 2026 budget for IRS funding would chip away at that even further. 

The IRS has also not been immune to the Trump administration’s attempt to make life miserable for federal employees. The agency has lost a quarter of its workforce since 2025 to layoffs, the deferred resignation offer pushed by Elon Musk’s so-called Department of Government Efficiency, early retirements, and other separations (TIGTA 2025).

The sharp turn away from the Biden administration’s support of the IRS represents a missed opportunity. While it would be near impossible to fully close the tax gap, Sarin and Summers (2019) estimate that some modest and doable steps could reliably collect significantly over $100 billion per year over the next decade from increased enforcement efforts.

How much could a campaign of confidence-building measures to tax the ultrarich raise?

These measures to enact a series of tax reforms laser-targeted at only the rich could raise significant revenue. One obvious benchmark suggests itself: the current fiscal gap. The fiscal gap is how much (as a share of GDP) taxes would need to be raised or spending would need to be cut to stabilize the ratio of public debt to GDP. Today this gap stands at roughly 2.2%.

Table 1 gives a rough score for each of the provisions mentioned above. It then conservatively estimates the combined revenue-raising potential of this package. It assumes that the whole policy package is equal to 70% of the sum of its parts. This would help account for some fiscal “externalities” (i.e., taxing wealth means wealth grows more slowly over time and, hence, reduces tax collections on income earned from wealth going forward). It also would help account for some potentially duplicative effects that could reduce some revenue collected by the combination of these reforms. For example, if the step-up in basis were eliminated, the incentive for rich households to finance consumption with loans would be reduced, so the revenue generated by treating the pledging of collateral as a realizable event would likely be reduced.

Table 1

This combination of confidence-building measures to tax the rich would unambiguously be able to close the nation’s current fiscal gap. The sum of the parts of this agenda would raise roughly 4% of GDP over the long run, and even if the sharp 30% discount on the sum of these parts was applied, it is still just under 3% of GDP. Telling the American public that this package of tax increases on the ultrarich had put the nation on a fully sustainable long-run trajectory while still leaving enough money to fund something as large as universal pre-K for 3- and 4-year-olds or a radical increase in more generous coverage in the nation’s unemployment insurance system could be seismic for changing the tax debate in the United States.

For those like us who advocate for even larger expansions of the U.S. system of income support, social insurance, and public investment, the future political debate over how to finance them would be on much more favorable ground with the public’s support. The conditions of the debate would change if the public could shake the (too often true) impression that the U.S. government is failing to ask the ultrarich and corporations to do their part to contribute to the nation’s fiscal needs.

Conclusion

Obviously, this program of laser-targeting tax increases on the ultrarich is not the policy of the current Trump administration or the Republican majority in Congress. They have already spent the first half of 2025 forcing through a monster of a reconciliation bill, which extended the expiring provisions of the TCJA, provisions that provide disproportionate benefits to the very rich. The reconciliation bill represents a shocking upward redistribution of income from the very poor to the very rich, paying for trillions of dollars in tax cuts that primarily benefit the wealthy by stripping health care and food assistance from millions of Americans. 

But as damaging as extending these expiring provisions will be to tax fairness and economic outcomes, they might be even more damaging to the public’s confidence that tax policy can ever be reoriented to ensure that the ultrarich and corporations pay their fair share. Instead, the debate over the expiring provisions will draw attention to two facts. First, the large majority of U.S. households will see a tax cut (relative to current law), but these cuts will be much larger for the rich. For example, the bottom 60% of households will see a tax cut of just over $1 per day, while the top 1% will see a cut of $165 per day, and the top 0.1% will see a whopping $860 per day. Second, these regressive tax cuts are bundled with spending cuts that will sharply reduce incomes for the people in the bottom half of the income distribution, leaving them net losers overall.

This combination of facts will continue to feed perceptions that the only way typical households can get something—anything—out of tax policy debates is if they settle for crumbs from the feast enjoyed by the richest. And even these crumbs will be taken back in the form of cuts elsewhere.

It’s time to reverse these perceptions. If policymakers engage in a confidence-building set of measures to raise significant revenue only from the ultrarich, the public’s stance toward tax policy can be changed from being anti-tax to being willing to have debates about the pros and cons of public sector expansions, content in the knowledge that the very rich will neither escape their obligations nor claim the lion’s share of benefits yet again.

Notes

1. Obviously not all of this downward ratchet is bad. The steep decline in tax rates for the poorest families, driven by expanding Earned Income and Child Tax credits, has been a very welcome policy development in recent decades.

2. The strong relationship between the level of gross domestic product (GDP) per capita and the share of the public sector in a nation’s economy is recognized enough to have been named: Wagner’s Law.

3. On the relative smallness of the U.S. fiscal state (both spending and taxation as shares of GDP), see EPI 2025.

4. Bivens and Mishel 2021 note the number of intentional policy changes outside the sphere of taxation that have driven much of the growth in pre-tax inequality.

5. For example, both the Affordable Care Act (ACA) and the Inflation Reduction Act (IRA) paid for the additional spending on public investments and income support programs they called for with new taxes. That said, because Republican-driven tax cuts were passed in the interim, the upshot has been mostly larger budget deficits over time.

6. See Kogan and Vela 2024 for an explanation and estimation of the U.S. fiscal gap in 2024.

7. The rate of return assumption matters a lot for how durable revenue increases from a wealth tax will be over time. A rate of 8.5% is on the high end of many projections for rates of return to wealth in coming decades.

8. Specifically, they note about wealth taxes: “Set the rates medium (2%–3%) and you get revenue for a long time and deconcentration eventually” (Saez and Zucman 2019b). When they estimate the potential revenue of Elizabeth Warren’s 2% wealth tax on estates over $50 million (with an additional tax of 1% on wealth over a billion), they find it raises roughly 1% of GDP per year (Saez and Zucman 2019a).

9. This estimate comes from the Penn Wharton Budget Model 2022.

10. For a description of that surtax and the competing revenue options debated at the time, see Bivens and Gould 2009.

11. This number has been inflated to 2024 dollars.

12. See Gardner et al. 2024 on the effective corporate income tax rate before and after the TCJA.

13. For example, the Distributional Financial Accounts of the Federal Reserve Board (2025) estimate that the wealthiest 1% of households own over 30% of corporate equities, while the wealthiest 10% own just under 90%.

14. See Sarin and Summers 2019 for how much of the tax gap is driven by poor reporting requirements on income flows disproportionately earned by the rich—mostly various forms of noncorporate business income.

15. This range of estimates comes from the Joint Committee on Taxation (JCT) 2023, and Lautz and Hernandez 2024. Part of this variation is about how much extra revenue is allocated to the strict step-up in basis termination versus the extra revenue that is collected through the normal capital gains tax as a result of closing this loophole.

16. The details of this gap can be found in Office of Tax Analysis 2016. The upshot is that some business owners have managed to deny being active managers of their firms and have, hence, avoided being taxed on labor earnings, but they have somehow also managed to deny being passive owners of their firms, hence avoiding the NIIT as well. It is bizarre that this not-active but not-passive category of owner has been allowed to be given legal status, but that does seem to be the state of the law currently, until Congress acts.

17. See Bivens 2016 on how profits held abroad by deferring taxation were not a constraint on any meaningful economic activity.

18. I say “appear” because the ability and even the specific strategies corporations have to make profits clearly earned by sales in the United States appear on paper to have been earned in tax havens are all extremely well documented by now, including in Zucman 2015.

19. See Elzayn et al. 2023 for evidence that the audit patterns of the IRS in the mid-2010s were driven by these considerations.

References

Batchelder, Lily. 2020. Leveling the Playing Field Between Inherited Income and Income from Work Through an Inheritance Tax. The Hamilton Project, The Brookings Institution, January 28, 2020.

Bivens, Josh. 2016. “Freeing Corporate Profits from Their Fair Share of Taxes Is Not the Deal America Needs.” Working Economics Blog (Economic Policy Institute), September 27, 2016.

Bivens, Josh, and Elise Gould. 2009. House Health Care Bill Is Right on the Money: Taxing High Incomes Is Better Than Taxing High Premiums. Economic Policy Institute, December 2009.

Bivens, Josh, and Lawrence Mishel. 2021. Identifying the Policy Levers Generating Wage Suppression and Wage Inequality. Economic Policy Institute, May 2021.

Brun, Lidía, Ignacio González, and Juan Antonio Montecino. 2025. “Corporate Taxation and Market Power Wealth.” Working Paper, Institute for Macroeconomic Policy Analysis (IMPA), February 12, 2025.

Clausing, Kimberly A., and Natasha Sarin. 2023. The Coming Fiscal Cliff: A Blueprint for Tax Reform in 2025. The Hamilton Project, The Brookings Institution, September 2023.

Economic Policy Institute (EPI). 2025. U.S. Tax and Spending Explorer.

Elazyn, Hadi, Evelyn Smith, Thomas Hertz, Arun Ramesh, Robin Fisher, Daniel E. Ho, and Jacob Goldin. 2023. “Measuring and Mitigating Racial Disparities in Tax Audits.” Stanford Institute for Economic Policy Research (SIEPR) Working Paper, January 2023.

Federal Reserve Board. 2025. Distributional Financial Accounts of the United States. Accessed April 2025.

Gardner, Matthew, Michael Ettlinger, Steve Wamhoff, and Spandan Marasini. 2024. Corporate Taxes Before and After the Trump Tax Law. Institute on Taxation and Economic Policy (ITEP), May 2, 2024.

Greenwald, Daniel L., Martin Lettau, and Sydney C. Ludvigson. 2025. “How the Wealth Was Won: Factor Shares as Market Fundamentals.” Journal of Political Economy 133, no. 4 (April): 1083–1132.

Hemel, Daniel, and Robert Lord. 2021. “Closing Gaps in the Estate and Gift Tax Base.” Working Paper, Coase-Sandor Working Paper Series in Law and Economics. University of Chicago Law School, August 13, 2021.

Joint Committee on Taxation (JCT). 2023. Estimates of Federal Tax Expenditures for Fiscal Years 2023–2027. JCX-59-23, December 7, 2023.

Kogan, Bobby, and Jessica Vela. 2024. What Would It Take to Stabilize the Debt-to-GDP Ratio? Center for American Progress, June 5, 2024.

Lautz, Andrew, and Fredrick Hernandez. 2024. Paying the 2025 Tax Bill: Step Up in Basis and Securities-Backed Lines of Credit. Bipartisan Policy Center, December 12, 2024.

Office of Tax Analysis. 2016. Gaps Between the Net Investment Income Tax Base and the Employment Tax Base, April 14, 2016.

Page, Benjamin I., Larry M. Bartels, and Jason Seawright. 2013. “Democracy and the Policy Preferences of Wealthy Americans.” Perspectives on Politics 11, no. 1 (March): 51–73.

Penn Wharton Budget Model. 2022. Decomposing the Decline in Estate Tax Liability Since 2000, University of Pennsylvania, July 28, 2022.

Rau, Eli G., and Susan Stokes. 2024. “Income Inequality and the Erosion of Democracy in the Twenty-First Century.” PNAS 122, no. 1, December 30, 2024.

Saez, Emmanuel, and Gabriel Zucman. 2019a. “Policy Memo on Wealth Taxes,” September 22, 2019.

Saez, Emmanuel, and Gabriel Zucman. 2019b. Progressive Wealth Taxation. Brookings Papers on Economic Activity, Fall 2019.

Sarin, Natasha, and Lawrence H. Summers. 2019. “Shrinking the Tax Gap: Approaches and Revenue Potential.” National Bureau of Economic Research (NBER) Working Paper no. 26475, November 2019.

Tax Policy Center (TPC). 2025. Revenue Estimate of Wealth Tax Proposal from Why Not Initiative.

Treasury Inspector General for Tax Administration (TIGTA). 2025. Snapshot Report: IRS Workforce Reductions as of May 2025. Report Number 2025-IE-R027. July 18, 2025.

Williamson, Vanessa S. 2017. Read My Lips: Why Americans Are Proud to Pay Taxes. Princeton, N.J.: Princeton Univ. Press, March 2017.

Zucman, Gabriel. 2015. The Hidden Wealth of Nations: The Scourge of Tax Havens. Translated by Teresa Lavender Fagan. Foreword by Thomas Piketty. Univ. of Chicago Press.

Although the economic consequences of reduced or increased immigration flows are often contested, recent research clearly demonstrates that immigration enforcement that increases deportations will also cause job losses for both foreign-born and U.S.-born workers. This report uses that research to estimate the employment consequences for all workers if the Trump administration succeeds in carrying out its goal of 1 million deportations annually over the next four years.

Deportations will lead to employment losses

How deportations reduce jobs for immigrants and U.S.-born workers

Deportations sharply reduce the supply of labor, threatening the ability of employers to generate revenue and pay for business expenses like rent, machinery, and even the labor of any remaining workers. Immigrant labor supply will fall because immigrants tend to have high employment rates, so arresting, detaining, and removing immigrants from the country removes people from the workforce. Also, others who are not formally deported may need to leave the country to accompany their deported family or community members. In addition, deportations raise the risks of arrest and removal for remaining immigrants and cause them to curtail activities with the potential for interaction with the government, like labor market participation.

These chilling effects can even extend to citizens who are by law not subject to deportation but are nevertheless connected to communities at risk. For example, Alsan and Yang (2024) examined the effects of “Secure Communities,” a large interior immigration enforcement program in the United States that began in 2008. This program linked state and local government databases to federal immigration enforcement in order to detect immigrants who are deportable and led to increased detentions and deportations.1 Alsan and Yang (2024) found that Hispanic citizen-headed households reduced their participation in federal safety programs in response to Secure Communities enforcement actions, perhaps out of concern for other family members and close contacts.

Regardless of the exact mechanisms, deportations can cause a sharp and abrupt enough fall in labor supply that some employers will respond by shutting down operations entirely. For example, Ali, Brown, and Herbst (2024) found that Secure Communities, which led to increased immigration-related arrests and deportations, reduced the number of child care facilities, harming both immigrant and U.S.-born employment in the child care sector.

Deportations also reduce labor market leverage that immigrants have with employers. The rising threat of arrest or deportation makes it harder for immigrants to find new employment opportunities that do not risk their ability to stay in the U.S., compelling them to stay with a bad or lawbreaking employer. With shrinking alternative job options, immigrants are forced to settle for lower wages and worse working conditions. These deteriorating conditions for immigrant workers will negatively affect all workers who compete with immigrants in the same labor markets since lower wages and bad conditions for one group will drag down wages and conditions for all workers. Employment will decline for U.S.-born workers, as they are less likely to work at jobs with falling wage rates.

As working conditions deteriorate, so does the willingness of workers (either immigrant or U.S.-born) to report on degraded conditions. For example, Grittner and Johnson (2024) found that the rollout of Secure Communities increased workplace injuries and reduced worker safety complaints at workplaces with higher shares of Hispanic workers. In addition, Grittner and Johnson found that this increased immigration enforcement caused minimum wage violations to increase among Hispanic workers and non-Hispanic workers. Deportations limited the alternative job options of those workers most at risk of expanded immigration enforcement, lowering their labor market leverage, which, in turn, reduced the bargaining power of all workers competing in those same labor markets.

Because jobs held by U.S.-born and immigrant workers are often complementary and economically linked, the shrinking supply of immigrant labor can adversely affect employer demand for jobs held by both groups of workers. As Howard, Wang, and Zhang (2024) observe, when there are fewer immigrant roofers and framers to build the basic structure of homes, there will be less work available for U.S.-born electricians and plumbers. If there are fewer dishwashers and cooks, restaurants may limit their hours or shift their operations toward takeout, reducing the overall employment of waitstaff and managers.

Complementary immigrant and U.S.-born employment can also cut across sectors. East and Velásquez (2024) found that the Secure Communities enforcement program reduced the hours of immigrant child care workers and cleaners, and U.S.-born mothers of young children worked less in response, presumably due to increased care responsibilities at home.

Finally, the reduction in the immigrant population and their public activities is a reduction in consumers and business owners, negatively affecting consumer demand and investment on top of falling local demand due to reduced immigrant and U.S.-born employment. As immigrant employment and earnings fall, so will consumption of goods and services. Removing immigrants will also slow business creation and weaken employment demand, as immigrants are more likely than U.S.-born workers to start businesses (Azoulay et al. 2022).2 A large mass deportation program could also in principle generate very broad chilling effects on consumption. For example, declining numbers of international travelers to the United States will negatively affect the tourism industry. In general, purchases by nonresidents, including foreign students, are a major U.S. export, but that spending may drop precipitously when noncitizens face higher risks of detention and deportation.3

For all these reasons, increased immigration enforcement through arrests, detentions and deportations can reduce employment opportunities for noncitizens, immigrant citizens, and U.S.-born workers.

Recent studies on the employment effects of deportations

Recent empirical research finds that heightened immigration enforcement reduces employment, often causing job losses for both foreign- and U.S.-born workers.

Several studies show that Secure Communities led to large job losses as the program was rolled out across counties beginning in 2008. Secure Communities increased fingerprint and other information sharing between U.S. Immigrations and Customs Enforcement (ICE), the Federal Bureau of Investigation (FBI), and state and local law enforcement. The program allowed local law enforcement to hold those arrested, who may otherwise have been released, for up to 48 hours so that ICE could facilitate removal proceedings. As intended, Secure Communities led to a rapid increase in detentions and deportations. East et al. (2023) calculated that between 2008 and 2014, the program resulted in the deportations of more than 454,000 people.4

East et al. (2023) found that the Secure Communities rollout between 2008 and 2014 led to large overall employment losses for both immigrants and U.S.-born workers. Howard, Wang, and Zhang (2024) found that Secure Communities reduced the size of the construction sector, reducing immigrant and U.S.-born employment and delaying residential homebuilding. Ali, Brown, and Herbst (2024) found that the program reduced immigrant and U.S.-born employment in the child care sector, leading to a significant drop in the number of child care centers. Relatedly, East and Velásquez (2024) found that in response to Secure Communities, mothers of young children were less likely to be employed and worked fewer hours.

These studies demonstrate that increases in immigration-related arrests, detentions, and deportations harm the broader labor market, with particularly large negative consequences for certain sectors.5 The construction industry will be disproportionately harmed because of its large immigrant workforce, and child care centers also face staffing challenges even in the absence of increased immigration enforcement (Fee 2024).

How Trump’s escalating deportations will reduce employment

The scale of Trump’s deportations

The Trump administration plans to increase the number of deportations to unprecedented levels. For the purpose of estimating the employment effects of this policy, this report assumes that the deportation rate could reach 1 million people per year, totaling 4 million deportations over four years, a rate consistent with public and private statements by policymakers. Sacchetti and Bogage (2025) reported that internally the Trump administration has focused on deporting 1 million immigrants in one year. The Department of Homeland Security (DHS) Immigration and Customs Enforcement congressional budget justification for fiscal year 2026 requests funding increases “to support the Administration’s strategy of 1,000,000 removals per year” (DHS 2025b), and in a press release, the White House (2025) quoted the House Judiciary Committee as stating the 2025 Republican-led budget reconciliation bill “provides funding for at least 1 million annual removals.”6 An increase to 1 million deportations is similar to an annual scenario considered by the American Immigration Council (2024) in their report on the costs of mass deportation.

Figure A shows that, typically, the U.S. deports about 300,000 people per year. Deportation rates just exceeded that during the 2014–2019 period but dropped during the onset of the pandemic, primarily due to immigration restrictions that expelled migrants more immediately at the border.7 In fiscal year 2024, the U.S. deported about 330,000 people.

Figure A

Given these data, I assume that the United States baseline or “business as usual” rate of deportations is 330,000 annually. By aiming for 1 million deportations annually, the Trump administration intends to triple the baseline rate, increasing annual deportations by 670,000, for a four-year total increase of 2,680,000. Below, when I estimate the employment effects of the Trump administration’s increase in deportations to 4 million over four years, I use the 2,680,000 increase in deportations as the magnitude of the intensity of the Trump administration’s policies. On the one hand, this will underestimate job losses stemming from deportations generally if the annual rate of deportations prior to the Trump administration was already causing large employment reductions. On the other hand, the estimates will reflect the actual policy change made by the Trump administration; this method is also consistent with how the original research estimated the employment effects of an increase in police-based immigration enforcement due to the Secure Communities program, over and above the baseline immigration enforcement policy.8

Overall employment effects

To estimate the national employment effect of increased deportations, I extrapolate the employment effect estimates of the rollout of the Secure Communities immigration enforcement from East et al. (2023); Howard, Wang, and Zhang (2024); and Ali, Brown, and Herbst (2024). As described above, Secure Communities increased immigration-related arrests, detentions, and deportations across the United States.

East et al. (2023) found that the rollout of the Secure Communities immigration enforcement program reduced foreign-born employment in the United States by an average of 670,000 people over their study period.9 During that period, Secure Communities deported 454,000 people, suggesting that one deportation resulted in 1.47 fewer employed immigrants. Alternatively, a more conservative assumption is that one additional deportation by the Trump administration results in one fewer employed immigrant; this assumption is similar to the initial labor force shock modeled by McKibbin, Hogan, and Noland (2024).

This report takes the average of these two possibilities and assumes that one additional deportation results in about 1.24 immigrant job losses. If the Trump administration deports 4 million people over four years (increasing total deportations above baseline by 2,680,000), immigrant employment will fall by about 3.3 million (see Table 1).

Table 1

As discussed above, reductions in immigrant employment can also lead to U.S.-born employment losses. East et al. (2023) found that the Secure Communities program reduced the number of employed U.S.-born people, where the magnitude of U.S.-born employment losses was about 77.5% of the size of foreign-born employment losses.10 Therefore, I assume that one deportation, leading to 1.24 immigrant job losses, also results in 0.96 U.S.-born job losses. As Table 1 shows, 4 million deportations by the Trump administration will, therefore, cause the number of U.S.-born workers with jobs to fall by 2.6 million. Total job losses due to an increase in Trump administration deportations would be about 5.9 million, with job losses among the U.S.-born population accounting for about 44% of the total employment reduction.

Job losses in the construction and child care sectors resulting from Trump’s deportations

The increase in deportations will cause large declines in construction employment, likely due to large numbers of immigrants working in this sector and the high degree of complementarity among construction jobs held by immigrants and U.S.-born workers. Howard, Wang, and Zhang (2024) found that the increase in immigration enforcement associated with the Secure Communities program had large negative effects on immigrant and U.S.-born construction employment.

Specifically, their estimates imply immigrant and U.S.-born construction employment losses that are, respectively, 42.3% and 33.5% the size of immigrant and U.S.-born overall employment losses estimated by East et al. (2023).11 I then use these ratios to scale the overall job losses per deportation used above, yielding construction employment reductions of 0.52 immigrants and 0.32 U.S.-born workers per deportation.

Table 1 shows that, assuming 4 million total deportations over four years, about 1.4 million fewer immigrants and 861,000 fewer U.S.-born workers will be employed in construction. Some of these workers will no longer be employed, some will work fewer hours, and others may move to other sectors. In total, however, the construction sector will shrink precipitously, losing 18.8% percent of its workforce relative to 2024 employment levels.

Research also shows the child care sector will experience large employment declines after increases in deportations. As Ali, Brown, and Herbst (2024) observe, child care centers may face a particularly intense labor supply shock due to rising fear among immigrants who will increasingly try to avoid governmental authorities. Child care centers have relatively frequent interactions with the government because of regular, unannounced inspections; workers’ personal and earnings information is also often reported to authorities for licensing purposes. In addition, child care centers have high worker turnover and strict staffing ratios, so difficulties in recruiting and retaining staff could quickly lead to shutdowns. In particular, Ali, Brown, and Herbst (2024) found that the number of child care establishments shrank after the rollout of the Secure Communities program.

To estimate child care employment reductions, I use the employment-to-population ratios Ali, Brown, and Herbst (2024) provide for women in the child care sector, as well as separate population-level estimates, and then I divide the implied employment level changes by the deportation counts used in East et al. (2023).12 Table 1 shows the implied employment effects if the Trump administration deports 4 million people over four years. About 104,000 fewer immigrants and 444,000 fewer U.S.-born workers will be employed in the child care sector. Trump’s deportations will cause the total child care sector to shrink by 15.1%, a shock with potentially much broader labor market consequences when working parents are already having significant trouble finding care for their children. As East and Velásquez (2024) show, the broad expansion of immigration enforcement created by Secure Communities also led to a drop in the number of employed U.S.-born mothers who could not continue working without child care.

Trump’s deportations will cause job losses in every state

Because immigrants live throughout the entire country, deportations will cause job losses in every state. To create state-level estimates, I first distribute the additional number of national deportations by each state’s share of the national noncitizen population, under the assumption that states with higher (or lower) shares of noncitizens are more (or less) likely to experience deportations. For example, about 1 out of every 5 noncitizens in the United States lives in California, so I assume about 1 out of every 5 additional national deportations will occur in that state. Then I multiply these additional state-level deportations by the national multipliers of foreign-born (1.24) and U.S.-born (0.96) job losses per deportation. This is equivalent to allocating national job losses by each state’s share of national noncitizen employment; by construction, the sum of all job losses across states equals the national total.

Figure B shows that for a scenario of 4 million national deportations, the job loss levels across states vary widely. California’s 775,000 deportations imply total job losses of 1.1 million, equal to 6.2% of total employment in the state. Other states with very large predicted employment losses in percentage terms include Texas (5.8%), Florida (5.1%), New Jersey (5.1%), Nevada (4.7%), and New York (4.6%).

Figure B

Figure B also shows state-level construction job losses using the national construction deportation multipliers. To account for the fact that some states may have relatively more (or fewer) noncitizen workers in the construction sector, I allocate the national job losses by each state’s share of national noncitizen construction employment.13

Predicted estimates of construction job loss, therefore, vary across states due to the size of their noncitizen construction workforce. Figure B shows that some states, like Alabama, will experience smaller job losses than the average state because their construction sector is small, and fewer noncitizens work in it. Others like Texas (32.1%), Nevada (26.3%), California (25.5%), and North Carolina (25.5%) will see the largest percent reductions; construction job losses for these states will be about 40% of the national construction job loss estimate of 2.3 million workers. (The appendix to this report also shows detailed overall and construction-sector estimates for each state.)

Broader economic effects of the overall employment shock

The total employment effects after four years of deportations would be a historically large and persistent drop in employment, unprecedented outside of the worst recessions in U.S. history. In March, Congressional Budget Office (2025) projected that total civilian employment would grow by 4.2 million people between 2025 and 2029. In contrast, this analysis suggests that employment would actually fall in absolute terms by 2029, given the estimated job loss of about 5.9 million due to four years of Trump’s deportations.

A widespread reduction of immigrants will also likely raise the prices of goods and services throughout the economy. Immigrants are a somewhat deflationary force in the sense that they boost output more than they do demand—mainly because immigrants immigrants are younger and therefore more likely to work than U.S.-born residents, and because some of the immigrants’ income is not spent in the United States but is instead sent as remittances to other countries (Costa et al. 2024). As a result, the removal of immigrants will raise inflationary pressures.

In addition, because aggressive immigration enforcement will lead to a reduction in the number of workers and a subsequent drop in production, some businesses will charge higher prices if they continue to have consumers. For example, Howard, Wang, and Zhang (2024) found the rollout of the Secure Communities immigration enforcement program led to a construction slowdown that increased home prices.

What will happen to wages in the face of these shocks is somewhat unclear. In some cases, employers may try to raise wages to attract new workers, but in other cases, labor demand may fall, or some employers may choose to operate at lower levels of employment and wages.

The evidence in East et al. (2023) suggests that, overall, wages tend to decline in the face of increased deportations, particularly for U.S.-born workers. Howard, Wang, and Zhang (2024) presented some evidence that in the second year after a Secure Communities rollout, hourly wage rates in construction might have increased, perhaps for U.S.-born workers, but as the authors describe it, most of the relative change in construction wages is to keep them flat in the face of declining overall wages.14 Ali, Brown, and Herbst (2024) found that wage rates fell for both U.S.-born and immigrant women who are child care workers in response to increased immigration enforcement, but East and Velásquez (2024) found rising wages for low-educated women in household services.

All told, the existing evidence suggests that Trump’s deportations will not improve the hourly wage rates of the overall workforce or even U.S.-born workers in many instances.

Conclusion

The consequences of immigration on the labor market are often a matter for heated debate. While some studies have findings at odds with others, a fair assessment of the evidence suggests that reduced immigration generally will not lead to increased job opportunities for U.S.-born workers. A comprehensive empirical review by the National Academies (2017) found that “most studies find little effect of immigration on the employment of natives.” However, it is important to understand that the labor market consequences to the United States of increased deportations are likely to be far worse than the effects of gradually changing the size of the immigrant population through reduced immigration flows into the United States.

For immigrants and U.S.-born workers remaining in the United States, the main similarity between reduced immigration and increased deportations is a drop in the supply of immigrant workers. The reduced supply of labor can reduce competition for jobs and make it easier for some remaining immigrant and U.S.-born workers to find work. On the other hand, fewer immigrants lead to a general reduction in aggregate demand and a reduction in employer demand for complementary jobs. A priori, the net employment effect of reduced immigration on remaining workers is ambiguous and may indeed vary, depending on the specific group of workers under consideration.15

Deportations trigger some of the same mechanisms for affecting employment as reduced immigration flows, but there are two additional reasons deportations depress the employment of remaining immigrants and U.S.-born workers. First, unlike a gradual, longer-term reduction in the supply of labor, the sudden removal of the actual and potential workforce can cause employers to rapidly scale back operations and sometimes shut down entirely. Second, deportations greatly weaken the labor market leverage of any remaining immigrant workers, negatively affecting everyone competing in the same labor markets. Increased arrests and removals make immigrants’ employment situation vastly more precarious, reducing their alternative job options, and U.S.-born workers will, in turn, be working alongside ever more precarious employees who cannot reasonably complain about poor conditions and pay or join a union, making it more difficult for those U.S.-born workers to bargain for better conditions and pay as well. As a result, employers can pay lower wages and profitably operate with lower employment so that employment falls for both immigrant and U.S.-born workers.

These additional labor market effects may be why many studies on increased immigration enforcement more clearly signal negative employment effects for both immigrant and U.S.-born workers. Extrapolating from this evidence suggests the Trump administration’s deportation goals will cause a major blow to the U.S. labor market, squandering the full employment that the Trump administration inherited from the Biden administration and also causing immense pain to the millions of U.S.-born and immigrant workers who may lose their jobs.

Appendix

Appendix Table 1

Appendix Table 2

Notes

1. For more background on Secure Communities, see Waslin 2011.

2. See also the outsized immigrant ownership share in retail, restaurants, and neighborhood services described by Kallick 2015.

3. Annual purchases by nonresidents in 2024 were $218 billion, nearly three-quarters of the U.S. annual trade surplus in services (see BEA 2025, Tables 1.1 and 2.4.5U.)

4. See Alsan and Yang 2024 for a description of Secure Communities.

5. For other analysis related to removing immigrants from the United States, see Lee, Peri, and Yasunov 2022, which found that increased repatriations to Mexico between 1929 and 1934 reduced the employment of U.S.-born workers. Clemens, Lewis, and Postel 2018 estimated that the removal of Mexican bracero farmworkers during the 1960s did not increase the employment for U.S.-born farmworkers. The model developed by Chassamboulli and Peri 2015 predicts that deportations will reduce both U.S.-born and immigrant employment. In a review of related research, Lynch and Ettlinger 2024 argue that “deportation of unauthorized immigrants would shrink the economy, cause American workers to lose jobs, likely reduce the wages of U.S. citizens, lose the taxes paid by deported unauthorized immigrants and worsen the finances of federal, state and local governments.”

6. The legislation triples funding for ICE and quadruples the annual funding for immigrant prisons (Costa 2025).

7. Technically, the deportations shown in Figure A are “removals,” based on a formal order of removal and typically carried out by ICE but also sometimes by Customs and Border Protection. In addition to removals, there have been tens to hundreds of thousands of other “returns” of migrants, typically occurring at the border. The figure also omits the pandemic-based Title 42 expulsions used to immediately expel border crossers during 2020–2023. See DHS 2025a.

8. In fiscal year 2007, just before the rollout of the Secure Communities program, the United States deported about 319,000 people (see Table 39 of DHS 2022).

9. The estimate of -0.387 from Table 3, panel B, specification 1 of East et al (2023) divided by 100 and then multiplied by their baseline population of 173 million yields a low-education foreign-born employment loss of 670,000. In extrapolating this estimate to all immigrants, I assume that there are no high-education foreign-born employment losses.

10. East et al. 2023 report an effect size of -0.387 for the low-education foreign-born population in Table 3, panel B, specification 1, and an effect size of -0.300 for the U.S.-born population in Table 4, panel B, specification 1.

11. Based on the estimates in text and what is plotted in Figure 4 of Howard, Wang, and Zhang 2024, I assume the average construction employment change over three years per 100 people is about -0.164 for lower-education foreign-born workers and about -0.100 for U.S.-born workers. The analogous estimates from East et al. 2023 are, respectively, -0.387 and -0.300.

12. Table 6 of Ali, Brown, and Herbst 2024 reports child care employment-to-population ratio changes for females ages 20–55 of -0.0025, -0.0012, -0.0011, and -0.0014 for, respectively, the low-education foreign-born, high-education foreign-born, low-education U.S.-born, and high-education U.S.-born population. From the basic monthly Current Population Survey, I calculate the population levels for these groups during 2005–2007 to obtain foreign-born employment reductions of 17,700 and U.S.-born employment reductions of 75,140. Dividing these by the 454,000 deportations reported in East et al. 2023 implies about -0.04 foreign-born and -0.17 U.S.-born employment reductions per deportation.

13. Again, this is mechanically the same as allocating the national number of additional deportations by shares of noncitizen construction employment and multiplying these new state-level deportations by the same national employment reductions of 0.52 foreign-born construction jobs and 0.32 U.S.-born construction jobs per deportation.

14. The top left panel of Figure 11 of Howard, Wang, and Zhang 2024 shows a marginally statistically significant increase in construction wages after two years. The bottom two panels show that relative to wages in all industries, the wages of lower-educated foreign-born construction workers may have stayed flat, whereas the wages of U.S.-born construction workers may have increased.

15. To the extent that reduced or increased immigration causes some negative labor market effects, Costa et al. 2024 argue that policymakers can keep unemployment low by ensuring tight labor markets with stimulative fiscal and monetary policies.

References

Ali, Umair, Jessica H. Brown, and Chris M. Herbst. 2024. “Secure Communities as Immigration Enforcement: How Secure Is the Child Care Market?” Journal of Public Economics 233 (May).

Alsan, Marcella, and Crystal S. Yang. 2024. “Fear and the Safety Net: Evidence from Secure Communities.” Review of Economics and Statistics 106, no. 6: 1427–1441.

American Immigration Council. 2024. Mass Deportation: Devastating Costs to America, Its Budget and Economy, Special Report, October 2, 2024.

Azoulay, Pierre, Benjamin F. Jones, J. Daniel Kim, and Javier Miranda. 2022. “Immigration and Entrepreneurship in the United States.” American Economic Review: Insights 4, no. 1 (March 2022): 71–88.

Bureau of Economic Analysis (BEA). 2025. National Income and Product Accounts. Accessed June 1, 2025.

Chassamboulli, Andri, and Giovanni Peri. 2015. “The Labor Market Effects of Reducing the Number of Illegal Immigrants.” Review of Economic Dynamics 18, no. 4 (October 2015): 792–821.

Congressional Budget Office. 2025. Data Supplement to The Long-Term Budget Outlook: 2025 to 2055. Accessed June 23, 2023.

Clemens, Michael A., Ethan G. Lewis, and Hannah M. Postel. 2018. “Immigration Restrictions as Active Labor Market Policy: Evidence from the Mexican Bracero Exclusion.” American Economic Review 108, no. 6 (June 2018): 1468–1487.

Costa, Daniel. 2025. “House Republican Budget Bill Gives Trump $185 Billion to Carry Out His Mass Deportation Agenda—While Doing Nothing for Workers: Immigration Enforcement Would Have 80 Times More Funding Than Labor Standards Enforcement.” Working Economics Blog (Economic Policy Institute), June 5, 2025.

Costa, Daniel, Josh Bivens, Ben Zipperer, and Monique Morrissey. 2024. The U.S. Benefits from Immigration but Policy Reforms Needed to Maximize Gains. Economic Policy Institute, October 4, 2024.

Department of Homeland Security (DHS). 2022. 2022 Yearbook of Immigration Statistics. Office of Homeland Security Statistics. Accessed May 29, 2025.

Department of Homeland Security (DHS). 2025a. Immigration Enforcement and Legal Processes Monthly Tables. Office of Homeland Security Statistics. Accessed May 29, 2025.

Department of Homeland Security (DHS). 2025b. U.S. Immigration and Customs Enforcement Budget Overview, Fiscal Year 2026 Congressional Justification. Accessed May 29, 2025.

East, Chloe N., Annie L. Hines, Philip Luck, Hani Mansour, and Andrea Velásquez. 2023. “The Labor Market Effects of Immigration Enforcement.” Journal of Labor Economics 41, no. 4: 957–996.

East, Chloe N., and Andrea Velásquez. 2024. “Unintended Consequences of Immigration Enforcement: Household Services and High‐Educated Mothers’ Work.” Journal of Human Resources 59, no. 5: 1458–1502.

Economic Policy Institute (EPI). 2025. Current Population Survey Extracts, Version 2025.6.11.

Fee, Kyle D. 2024. Using Worker Flows to Assess the Stability of the Early Childcare and Education Workforce, 2010–2022. Federal Reserve Bank of Cleveland, Community Development Report, January 19, 2024.

Grittner, Amanda, and Matthew S. Johnson. 2024. “Complaint-Driven Regulation and Working Conditions: Evidence from Immigration Enforcement.” Working Paper, March 29, 2024.

Howard, Troup, Mengqi Wang, and Dayin Zhang. 2024. “Cracking Down, Pricing Up: Housing Supply in the Wake of Mass Deportation.” Working Paper, October 2024.

Kallick, David Dyssegaard. 2015. Bringing Vitality to Main Street: How Immigrant Small Businesses Help Local Economies Grow, Fiscal Policy Institute and Americas Society/Council of The Americas, January 2015.

Lee, Jongkwan, Giovanni Peri, and Vasil Yasenov. 2022. “The Labor Market Effects of Mexican Repatriations: Longitudinal Evidence from the 1930s.” Journal of Public Economics 205 (January 2022): 104558.

Lynch, Robert G., and Michael Ettlinger. 2024. “Literature Review on the Economic Consequences of the Deportation of Unauthorized Immigrants.” Working Paper, July 2024.

McKibbin, Warwick J., Megan Hogan, and Marcus Noland. 2024. “The International Economic Implications of a Second Trump Presidency.” Peterson Institute for International Economics Working Paper 24-20, September 2024.

National Academies of Sciences, Engineering, and Medicine (National Academies). 2017. The Economic and Fiscal Consequences of Immigration. Washington, D.C.: The National Academies Press.

Sacchetti, Maria, and Jacob Bogage. 2025. “‘One Million.’ The Private Goal Driving Trump’s Push for Mass Deportations.” Washington Post, April 12, 2025.

Waslin, Michele. 2011. The Secure Communities Program: Unanswered Questions and Continuing Concerns. American Immigration Council Immigration Policy Center, November 2011.

The White House. 2025. “The One Big Beautiful Bill Will Crack Down On Illegal Immigration” (press release). May 17, 2025.

Figure A

Although the consequences of higher or lower immigration flows are often contentious, recent economic research clearly shows that increases in immigration enforcement broadly harm the labor market, often reducing the employment of both immigrants and U.S.-born workers. For example, when increased immigration enforcement leads to fewer immigrant roofers and framers to build the basic structure of homes, then there will be less work available for U.S.-born electricians and plumbers. When child care workers are afraid to report to work, child care centers will curtail operations and may even shut down, and U.S.-born parents will work fewer hours due to increased care responsibilities. Increased deportations and the threat of aggressive immigration enforcement also reduce aggregate demand by shrinking the number of consumers and business owners. Further, making immigrants’ employment situation more precarious limits their outside options and puts downward pressure on the wages and employment of all workers.

Previous increases in immigration enforcement have caused widespread job losses. Studies of the Secure Communities program—a large interior immigration enforcement program that began in 2008 and increased detentions and deportations by linking state and local government databases to federal immigration enforcement—found that it reduced the employment of immigrants and U.S.-born workers in construction, child care, and across the overall economy.

Based on this research, we can analyze the labor market impact from Trump’s mass deportations. Over the period one study analyzed, Secure Communities deported 454,000 people and reduced immigrant employment by about 670,000 people.1 This suggests one deportation resulted in 1.47 fewer employed immigrants. A more conservative assumption is that one deportation results in one fewer employed immigrant, similar to the initial labor force shock modeled in other research. Taking the average of these two scenarios, one additional deportation reduces immigrant employment by 1.24 jobs. In addition to reducing the employment of immigrants, the analysis of Secure Communities also found that the program reduced U.S.-born employment as well, with U.S.-born job losses equal to 77.5% of immigrant job losses.2 Combining these estimates, one deportation also results in 0.96 U.S.-born job losses.

Given that the U.S. government deported about 330,000 immigrants last fiscal year, the Trump administration’s goal of deporting one million immigrants annually would triple the usual deportation rate and result in 2.7 million additional deportations over four years. These estimates imply that, after four years, there will be 3.3 million fewer immigrants and 2.6 million fewer U.S.-born workers employed if the spending bill passes and the Trump administration is successful in its immigration enforcement goals. In a forthcoming report, I estimate that almost half of the job losses are in the construction and child care sectors—both sectors could shrink by more than 15%.

If the spending bill passes, the details of how increased immigration enforcement will play out are of course uncertain, depending on popular resistance, as well as legal and logistical challenges. But what is clear is that the bill will fund and catalyze an unprecedented amount of immigration enforcement.

With the Senate passing the Republican budget bill, a massively expanded police state is perilously close to reality and will result in fewer jobs and more precarious working conditions, not to mention new detention camps across the country and an unprecedented level of government surveillance. There is no upside to the mass deportations enabled by the Republican budget bill. While Trump and other conservatives claim that increased arrests, detentions, and deportations will somehow magically create jobs for U.S.-born workers, the existing evidence shows that the opposite is true: they will cause immense harm to workers and families, shrink the economy, and weaken the labor market for everyone.

Notes

1. The estimate of -0.387 from Table 3, panel B, specification 1 of East et al (2023) divided by 100 and then multiplied by their baseline population of 173 million yields a low-education foreign-born employment loss of 670,000. In extrapolating this estimate to all immigrants, I assume that there are no high-education foreign-born employment losses.

2. East et al (2023) report an effect size of -0.387 for the low-education foreign-born population in Table 3, panel B, specification 1, and an effect size of -0.300 for the U.S.-born population in Table 4, panel B, specification 1.

With the unemployment rate at 4 percent or below for eight consecutive months, 2018 appears to be the year when the economy finally became healthy again. But while low unemployment is good news, it doesn’t tell the whole story of how typical families are faring in the current economy.

As the economy normalizes following a long, slow recovery from the Great Recession, we are quickly resuming our prerecession course of rising inequality. The fruits of economic growth are bypassing typical families and going straight into the hands of the already-rich.

Our current policy trajectory is doing nothing to reverse the trend of inequality. But it’s doing plenty to widen it. This year’s edition of Top Charts highlights how policy choices continue to exacerbate inequality and how we can achieve more broadly shared prosperity through better policy choices.

The upward march of inequality is firmly reestablishing itself: Cumulative percent change in real annual earnings, by earnings group, 1979–2017

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While top 1 percent earnings took a dive following the Great Recession, by 2017 those earnings had risen to their highest level ever, and the annual earnings of the top 1 percent had risen 157 percent cumulatively since 1979. For the top 0.1 percent, earnings have grown a whopping 343.2 percent since 1979. In contrast, earnings of the bottom 90 percent of workers rose just 22.2 percent over the same period.

The dynamic of large but temporary earnings declines for the highest earners during the Great Recession reflects the composition of their pay packages. For CEOs and other executives in the top 1 and 0.1 percent, earnings include stock options and other compensation measures linked strongly to firms’ stock market performance. As the stock market fell rapidly during the recession, this led to a sharp decline in earnings. But as stock prices went back up, so did the earnings of the top 1 and 0.1 percent—and so did inequality.

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Depending on the state, the average top 1-percenter makes between 12.7 and 44.4 times more each year than the average bottom 99-percenter

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Rising inequality is not just a story of those on Wall Street, in Hollywood, or in the Silicon Valley reaping outsized rewards. Measured by the ratio of top 1 percent to bottom 99 percent income in 2015, every state has a sizable gap between the fortunate few at the top and everybody else. In eight states plus the District of Columbia, that ratio of top-to-bottom incomes is greater than the national ratio of 26.3-to-1.

The post–Great Recession recovery in top incomes—combined with unequal income growth since the 1970s—has America hurtling back toward levels of inequality that characterized the Gilded Age of the 1920s. In five states we’ve already surpassed Gilded Age levels of inequality. EPI research shows that in New York, Florida, Connecticut, Nevada, and Wyoming, the top 1 percent’s share of overall income tops the 1928 overall national record of 23.9 percent. Nationwide, the top 1 percent took home 22.0 percent of all income in 2015.

While the degree of income inequality differs across the country, the causes are mostly common and clear: intentional policy decisions to shift bargaining power away from working people and toward the top 1 percent.

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The Fed can look to the late 1990s for guidance on how to raise wages: Average annual wage growth from 1996–2001 vs. all other years between 1979 and 2017

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Wages grew much more—and more equally—from 1996 to 2001 than in any of the other years between 1979 and 2017. Why? What was different about the late 1990s that policymakers should seek to emulate?

The most important difference was sustained low unemployment. The Fed kept interest rates low, allowing the unemployment rate to fall to levels far below what was considered sustainable for keeping inflation in check. And yet inflation did, in fact, remain in check. The late 1990s also saw an increase in the federal minimum wage, which helped boost wage growth at the bottom.

The Fed’s willingness to tolerate low unemployment, along with the boost to the minimum wage, paid enormous dividends in reducing inequality: annual wage growth for a 20th-percentile worker (1.8 percent) and for the median worker (1.7 percent) approximated that of a 95th-percentile worker (2.0 percent). In contrast, across all other years between 1979 and 2017, average annual wage growth for low- and middle-wage workers was essentially zero, while high-wage workers enjoyed consistently positive (if not hugely impressive) growth.

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Attacks on unions have hurt their ability to hold inequality in check: Union membership and share of income going to the top 10 percent, 1917–2015

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This chart is a dramatic representation of how essential unions are to keeping inequality in check. The growth in union membership in the late 1930s and early 1940s coincided with a falling share of income going to the top 10 percent. A strong labor movement means workers have more power to negotiate with their employers for a proportionate share of income growth. That power is precisely what corporations and policymakers doing their bidding have increasingly been eroding. Attacking unions makes sense from a bottom-line perspective: for corporations, the easiest path to profits is not in achieving greater efficiency and innovation but in suppressing wages.

As union membership has declined over the past 40-plus years, the top 10 percent have captured a greater and greater share of income. Breaking the momentum of rising inequality will require a much-strengthened labor movement. For lawmakers who will form a progressive majority in the U.S. House of Representatives in January 2019, the path is clear: enact ambitious reforms to the laws governing union organizing and collective bargaining to level the playing field and return bargaining power to workers.

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An attack on public-sector unions is an attack on women, teachers, and African Americans: Distribution of unionized state and local government workers

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In recent years, anti-union interests have focused their attack on public-sector workers—the workforce with the highest rate of union representation. In 2018, a small group of foundations with ties to the largest and most powerful corporate lobbies celebrated their newest success: the Supreme Court decision in Janus v. AFSCME Council 31. The court ruling effectively stripped state and local government public-sector unions of their ability to collect fair share fees to cover the costs of representing workers who choose not to join their workplace’s union. By eliminating fair share fees, the ruling goes a long way toward stripping workers of their ability to organize and bargain collectively.

As this chart shows, this attack on state and local government unions constitutes an attack on women, teachers, and African Americans. Women and African Americans make up a disproportionate share of workers in the public sector who are represented by a union (relative to their shares of the private-sector workforce). And while teachers constitute the single largest subgroup of union workers in state and local government, union workers also include those serving the public as administrators, social workers, police officers, firefighters, and other professionals. The good news: actions policymakers take to bolster public-sector unions will disproportionately benefit women, African Americans, and teachers.

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Raising the minimum wage would lift millions of African Americans and Hispanics out of poverty: Black and Hispanic nonelderly poverty rates in 2017, under actual, 1968-level, and a more ambitious minimum wage

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Although the minimum wage is first and foremost a wage-boosting labor standard, it is also a critical anti-poverty tool. Applying new research on poverty’s response to income changes shows that we are consigning millions of people to poverty by not wielding the minimum wage effectively.

The inflation-adjusted value of the federal minimum wage is about 25 percent less today than it was at its peak in 1968. Had policymakers enacted adjustments to keep the 1968 minimum wage rising with inflation, the black and Hispanic poverty rate would be 14 percent lower today—meaning 2.5 million fewer blacks and Hispanics would be in poverty.

Policymakers have proposed going beyond simple inflationary adjustments to raise the federal minimum wage to $15 by 2024. If we had an equivalent policy in place today, we would lift 7.4 million blacks and Hispanics out of poverty.

The call to raise the minimum wage beyond its 1968 level is coming from more than just anti-poverty advocates. Supporters view it as a remedy for widening wage inequality. That’s because the minimum wage affects wages of low-wage workers and workers further up the wage scale by setting a wage floor. Adjusting this important labor standard upward would ensure that typical workers share more in our country’s economic growth.

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Tipped workers fare better when they must be paid the regular minimum wage: How 'one-fair-wage' cities San Francisco and Seattle compare with the District of Columbia

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As policymakers examine options for raising minimum wages, they should not forget about the tipped minimum wage. The federal tipped minimum wage has not been raised since 1991 and is currently just $2.13 per hour. Some cities and states are moving toward “one-fair-wage” policies—which would abolish the subminimum wage for tipped workers and require that all workers be paid the same minimum wage as a base wage, regardless of tips.

But recent proposals to move toward one fair wage in certain cities and states have been met with fearmongering. Critics claim that increasing the tipped minimum wage will destroy jobs or somehow even lower wages for workers in tipped industries. A ballot measure to bring one fair wage to Washington, D.C., was passed by voters but repealed by the city council—who used such claims to defend their decision to ignore the will of the voters.

The evidence behind these big claims is sorely lacking. But there is evidence refuting these claims. San Francisco and Seattle have both implemented one-fair-wage policies. Relative to D.C., there is less inequality between tipped workers and nontipped workers in Seattle and San Francisco, and tipped workers in these cities are much less likely than D.C. tipped workers to be in poverty.

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Behind the teacher strikes is a big teacher pay gap: Teachers are paid less than other college graduates in every state

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A big story in 2018 was the wave of protests by teachers across the United States. These teachers were complaining that state and local governments had starved public education of the funding it needed to be effective. An obvious sign of severe education underfunding can found in the teacher wage penalty: the percent by which public school teachers are paid less than comparable workers. In every single state, the weekly wages of elementary, middle, and secondary public school teachers lags far behind wages of all other workers with a college degree. This teacher wage penalty has grown significantly over time, but is smaller in states with stronger collective bargaining rights for teachers.

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Most U.S. adults do not have a college degree: Shares of 18- to 64-year-olds with a given level of education, 2018

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Every now and then policymakers in Washington will concede that a given economic trend warrants attention because it might harm workers without a four-year college degree. The effect that growing trade flows with less developed countries has on wages is one example. Often, however, this concession to the interests of “noncollege” workers is made with the implicit assumption that workers without a college degree represent a niche interest in the U.S. economy. This assumption is way off base. Two-thirds of working-age people in the United States have less than a four-year degree. Hence, anything that harms noncollege workers is harming the large majority of the American working-age population.

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Our nation still has a long way to go in a quest for economic and racial justice: Social and economic circumstances of African American and white families, c. 1968 and c. 2018

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This year marked the 50th anniversary of the landmark Kerner Commission report, which documented systemic racism in the United States and the economic and social inequities facing African Americans in 1968. The report warned that “our nation is moving toward two societies: one black, one white, separate and unequal,” and called for a commitment to “the realization of common opportunities for all within a single [racially undivided] society.” In a 2018 EPI report, we asked the question: Fifty years later, how far have we progressed toward that goal?

Not nearly far enough. The chart shows that, while African Americans are in many ways better off in absolute terms than they were in 1968, they are still disadvantaged in important ways relative to whites. African Americans today are much better educated than they were in 1968—but young African Americans are still half as likely as young whites to have a college degree. Black college graduation rates have doubled—but black workers still earn only 82.5 cents for every dollar earned by white workers. And—as consequences of decades of discrimination—African American families continue to lag far behind white families in homeownership rates and household wealth. The data reinforce that our nation still has a long way to go in a quest for economic and racial justice.

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Progressive state policies create more broad prosperity than conservative state policies: Since 2010, Minnesota’s economy has outperformed Wisconsin’s

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Policy matters, and this includes state policies. In 2010, the neighboring states of Wisconsin and Minnesota embarked on divergent political paths when voters elected a conservative, Scott Walker, as governor of Wisconsin and a progressive, Mark Dayton, as governor of Minnesota. Because these states were neighbors who had suffered similarly from the Great Recession that began in 2008, their post-recession economic performance provides useful evidence on the effect of divergent policy paths.

Governor Walker and the Wisconsin state legislature pursued a highly conservative agenda centered on cutting taxes, shrinking government, and weakening unions. In contrast, Minnesota lawmakers under Governor Dayton enacted a slate of progressive priorities: raising the minimum wage, strengthening safety net programs and labor standards, and boosting public investments in infrastructure and education, financed through higher taxes (largely on the wealthy). The evidence shows clearly superior performance—faster wage and employment growth—in Minnesota.

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The Trump tax cuts didn't increase investment—but they did increase corporate profit hoarding

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Policy can fight inequality, or it can generate more. And the policy priority of the Trump administration seems to be increasing inequality. Besides an ongoing assault on regulatory safeguards that provide workers needed leverage in labor market bargaining, the signature policy achievement that the administration and congressional Republicans delivered was a large, regressive tax cut for corporations. The Tax Cuts and Jobs Act (TCJA) of 2017 was championed with loud claims that it would boost investment in productivity-enhancing plants and equipment—eventually leading to higher wages for workers. Nearly a year after the act’s passage, the verdict so far is clear: the tax cuts have simply fattened already bloated corporate profits. Productive investment has not been spurred at all.

The top half of the figure shows undistributed corporate profits as a share of corporate-sector value-added (where value-added is a measure of all income—either wages or profits—generated by a corporation). Undistributed corporate profits are profits not immediately passed through to shareholders as dividends and thus available for investing in plants and equipment, or buying back shares of stock, or for other financial engineering. These undistributed profits soared in the wake of the TCJA, largely because it allowed a tax-free repatriation of profits that had been stored offshore. (A similar tax holiday in the mid-2000s led to a similar spike in undistributed profits.)

The bottom half of the figure shows where this profit bonanza did not end up—in investments in productive plants and equipment. The quarterly investment growth rate shows no indication that investment is shifting into a higher gear because of the tax cut.

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The corporate sector is unsurprisingly where the clearest near-term effects of the TCJA can be seen. Domestic after-tax corporate profits increased from 6.7 percent of GDP in 2017 to 7.4 percent in the first quarter of 2018. In particular, undistributed domestic corporate profits surged in response to the TCJA’s tax windfall for multinational corporations on the profits they had booked offshore. As the chart below shows, much like the spike following the 2004 repatriation tax “holiday,” undistributed domestic corporate profits rose from 2.5 percent of gross domestic corporate value added in 2017 to 12 percent in the first quarter of 2018. We should note that 2004’s tax holiday didn’t lead to a surge in wage growth in subsequent years.

Figure A

Corporate tax revenues as a share of the economy fell by more than a third, from 1.8 percent of GDP in 2017 to 1.1 percent in the first quarter of 2018. This data makes it clear that the TCJA made some people very rich in the first quarter of 2018. (Second quarter corporate data has not been released yet.) Does Friday’s data on the overall economy show any indication that the corporate tax cuts have started to trickle down to workers as the Trump administration promised?

Nope, not at all. For one,  wages haven’t budged. To be fair, no serious economist should have argued that wages are expected to respond immediately to corporate tax cuts. Though that didn’t keep TCJA supporters (including some economists willing to act unserious) from touting bonuses paid late last year as proof that the tax cuts were working as intended. It’s worth reminding ourselves of the economic chain of causation that leads from corporate tax cuts to wage growth. First, the direct benefits of corporate tax cuts flow entirely to shareholders. That part has definitely happened. Then, (as we’ve previously explained), higher after-tax profitability is supposed to incentivize firms to invest more, with those investments financed by the higher savings that households provide in response to higher returns. These investments in turn are supposed to give workers more and better tools to do their jobs, which boosts productivity and eventually that increase in productivity translates into wage growth.

This means that investment is the key indicator to watch to try to see if the corporate tax cuts are working as promised. This investment boost is the first link in this long chain—other links can fail even if this one holds, but the entire chain fails if this first one never comes through. The initial data didn’t indicate any sort of clear boost to the trend of investment that would constitute a positive effect coming from the TCJA. And this quarter’s data is no different. As the chart below shows year-over-year growth in real, nonresidential fixed investment is roughly unchanged from the first quarter of 2018 and still doesn’t show any rapid upsurge of investment due to the TCJA.

Figure B

Past experience with corporate rate cuts remains the best indicator of what this round of cuts is likely to do. And that real-world evidence doesn’t support that corporate rate cuts will help typical American families.

As their first round of corporate tax cuts continue to fail to live up to the hype, rather than reversing course, House Republicans are doubling down, unveiling a second round of tax cuts. But the priority for tax policy going forward shouldn’t be locking in further regressive tax cuts, it should be rolling back the legislation’s business tax cuts, which are egregiously regressive and an ineffective way to raise the pay of typical American families.

This analysis from the Council of Economic Advisers reviews the evidence that has driven other developed countries to pursue the path of lower corporate tax rates and estimates how business tax reform in the Unified Framework for Fixing Our Broken Tax Code (hereafter, the “Unified Framework”) is expected to affect wages for American workers.

Reducing the statutory federal corporate tax rate from 35 to 20 percent would … increase average household income in the United States by, very conservatively, $4,000 annually. The increases recur each year, and the estimated total value of corporate tax reform for the average U.S. household is therefore substantially higher than $4,000. (CEA 2017)

This claim is clearly wrong. Economic logic and evidence argues strongly that American workers should not expect any noticeable wage boost from cutting corporate income taxes. The main findings of this paper are:

• Since World War II, productivity and wage growth in the U.S. economy have been significantly greater in periods with higher corporate tax rates.
• There is essentially no robust relationship between post-tax profit rates and productivity-enhancing business investment in the U.S. economy. This weak relationship is why efforts to boost post-tax profit rates with tax cuts will likely do little to grow productivity.
• Even were productivity to grow, it would not necessarily lead to wage growth (i.e., productivity growth is a necessary, not a sufficient, condition for wage growth). In fact, in recent decades, the link between economy-wide productivity growth and wages of the vast majority of American workers has been almost entirely severed. In other words, pay and productivity used to rise tightly together but they no longer do.
• A steep corporate tax rate cut in 1986 did nothing to reverse the widening fissure between typical workers’ pay and productivity growth—a gap that was already apparent in that year. Another corporate cut today would likely again fail to reconnect pay and productivity.
• To support its claim that corporate tax cuts would boost wages, the CEA report cherry-picks findings from the research literature and also uses a highly misleading graph relating wage changes over just a few years to corporate tax rate levels. Claims that cutting corporate taxes will boost wages should examine a longer time horizon and focus on tax changes, not levels.
• The real key to boosting wage growth for the vast majority of American workers is restoring economic leverage and bargaining power that workers once had but which have been redistributed from workers to capital owners and corporate managers. Yet the Trump agenda has consistently pushed policies and rule changes that further weaken workers’ leverage.

Real-world data shows weak-at-best links between corporate tax cuts and wage growth

Bivens and Blair (2017) explain in detail how the theory for corporate tax cuts as a wage-boosting tool breaks down in the face of real-world data. This report provides a quick overview of this theory and then highlights how its predictions compare with real-world data.

The theory is the following: First, corporate income tax cuts boost post-tax profits, which then boost the returns to owning stocks or bonds. These higher returns induce households to spend less and save more, and this increased supply of savings pushes down the cost of borrowing, or interest rates. Lower interest rates then induce firms to borrow more to finance new plants and equipment, and this raises productivity by giving workers more and better tools to work with. Second, competitive labor markets force employers to reward workers for their productivity increases buy paying them higher wages.

This theory provides a number of empirical propositions regarding the effect of corporate tax changes on wage growth that can be tested with real-world data. The data show that many of the key predictions will almost surely fail.

Before looking at the specific weak links in the causal chain, we review evidence relating to the overall claim that lower tax rates will boost productivity growth and wage growth. Figure A shows that at least since 1953, lower corporate rates (the dark line) have not noticeably boosted productivity growth and wage growth (the lighter lines). Both productivity and wage growth were substantially stronger in the first decades following World War II, when corporate tax rates were significantly higher than they were in the 1980s, 1990s, and 2000s.

Figure A

This figure is also remarkable because it shows that the corporate tax rate was dramatically slashed in the late 1980s—precisely when “the relationship between corporate profits and worker compensation broke down,” according to the recent CEA (2017) report. As the report says,

Prior to 1990, worker wages rose by more than 1 percent for every 1 percent increase in corporate profits. From 1990–2016, the pass-through to workers was only 0.6 percent, and looking most recently, from 2008–2016, only 0.3 percent. The profits of U.S. multinationals are still American profits, but, increasingly, the benefit of those profits do not accrue to U.S. workers.

While it is true that the gains from overall economic growth of any kind have largely bypassed typical American workers since the late 1970s,1 Figure A and the CEA’s own statement discredit the claim that steeps cuts in corporate taxes would increase wages: If a steep corporate rate cut in the 1980s coincided with a damaging delinking of wages and profits then, why would another steep cut today reconnect wages and profits? As the rest of this report shows, it would not.

One reason that corporate tax rate cuts won’t boost productivity and thus wages is the weak association between post-tax profit rates and business investment. Remember, in theory, cutting corporate taxes is supposed to boost private-sector savings, with the increased savings leading to lower interest rates that encourage more businesses to invest in productivity-enhancing plants and equipment. But as Figure B shows, the link between profit rates and investment is historically weak, which weakens the entire “tax cuts boost productivity” argument.

Figure B

The figure shows the post-tax profit rate, growth in nonresidential fixed investment (NRFI), and net NRFI (NFRI minus depreciation) as a share of total net domestic product (NDP) in three periods since 1948. While the post-tax profit rate is clearly higher in 2007–2016 than it was in earlier periods, NRFI growth is radically slower in 2007–2016. Some of this slowdown is simply due to slower economic growth overall post-2007, so the next set of bars scales NRFI as a share of NDP (NDP is gross domestic product minus depreciation). As the bars show, the post-2007 net NRFI share of NDP is notably lower than it was from 1948 to 2007.

Finally, even if corporate rate cuts did boost savings, lower interest rates, and spur productivity growth through more capital investment, the benefits of all of these changes for typical American workers are still dubious. For decades the U. S. economy has seen a growing wedge between productivity growth and wage growth, meaning that pay and productivity used to rise tightly together but they no longer do, as shown in Figure C. Since the late 1970s, only about 10–15 percent of each 1 percentage-point increase in productivity growth has translated into higher hourly pay for typical American workers (see Bivens and Mishel 2015 for an overview of trends in pay and productivity).

Figure C

There is very little reason to think that broad economic evidence indicating a historically weak payoff from cutting corporate taxes for American wage growth will be different in the future. First, many aspects of today’s economy further weaken the ability of corporate tax rate cuts to somehow unleash a new wave of economic growth that spurs wage growth. One aspect is the fact that the user cost of capital (i.e., interest rates) is already at historically rock-bottom rates and has created a savings glut. Rate cuts that reduce interest rates will therefore have very little purchase in today’s economy. Long-term interest rates have been historically low for a decade now, and much evidence indicates that powerful long-run structural influences will continue to hold long-term rates low in years to come.2 These structural influences have contributed to a glut of desired savings relative to planned investment. The excess supply of investable funds has predictably held down the price of these funds (interest rates).

The mirror image of this savings glut is a shortfall in aggregate demand (i.e., spending by households, businesses, and governments). This shortfall in aggregate demand has been the key constraint holding back American economic growth for at least the past eight years, if not longer. Corporate tax cuts are among the weakest fiscal policy tools available to spur demand growth because they benefit the highest-income households, who own the lion’s share of corporate stock in the American economy. Tax cuts aimed at lower- and working-class households are much more effective in spurring spending, because these families are far more likely than high-income households to spend (rather than save) an extra dollar they receive in tax cuts.3 Direct government spending (increased infrastructure spending, for example) is also far more effective than corporate tax cuts for boosting aggregate demand and spurring demand growth.

The CEA report provides no evidence that the historic nonrelationship between corporate taxes and wages will reverse in the future

In its recent report estimating large wage gains stemming from corporate tax cuts, the Trump administration’s Council of Economic Advisers (CEA 2017) claims that its conclusions are “driven by empirical patterns that are highly visible in the data, in addition to an extensive peer-reviewed research” (emphasis added).

The data do not show that corporate rate cuts boost wages

The claim that benefits of corporate tax cuts for boosting wages are “highly visible in the data” is clearly false. The figures earlier in this report confirm that there is essentially no visible relationship between corporate taxes, wages, and productivity. To buttress its claim, the CEA (2017) report provides a graph of wage growth from 2013 to 2016 for countries with the 10 highest and 10 lowest statutory corporate tax rates in the Organization of Economic Cooperation and Development (OECD), a group of mostly advanced economies. The graph (Figure 1 in the CEA report) shows that the unweighted average wage growth in the low-tax countries was significantly higher in 2015 and 2016 than the unweighted average wage growth in the higher-tax countries.4

It is deeply puzzling just what a graph that shows correlation is supposed to prove about causation. Most notably, there is no claim that corporate tax policy changed in those years and hence drove the higher wage growth in low-tax countries. Even the CEA itself implicitly confirms that corporate tax policy changes are the correct variable to assess, when later in its own report, it praises another study for assessing “long-run outcomes …[that should be] thought of as the recurring flow of income after the corporate tax changes have fully taken hold” (emphasis added). Showing a short-run graph that has results that are driven by corporate tax levels rather than changes completely fails to demonstrate that the benefits to wage growth of cutting corporate taxes are “clearly visible in the data.”

Using OECD data, we were able to essentially replicate the CEA results (data and figure available upon request; see Appendix). The most striking finding is that the fast wage growth of the “low-tax countries” in 2015 and 2016 is driven quite disproportionately by three small countries: Estonia (6.6 percent average wage growth in those years), Iceland (7.5 percent average wage growth), and Latvia (6.8 percent average wage growth). These three countries combined account for 30 percent of the unweighted “low-tax” sample but well over half of the wage growth in the low-tax group, yet their GDPs combined represent less than 0.4 percent of U.S. GDP.

Finally, we use this same OECD data to show changes in corporate tax rates and cumulative wage growth from 2000 to 2016 (see Figure D). This longer-run view of the effect of corporate rate changes on wage growth is much more relevant for testing theoretical predictions about changing corporate rates and wages. This figure shows that there is no obvious correlation between corporate rate changes and wages; again the beneficial effect of cutting corporate taxes on wages is absolutely not “highly visible in the data.” In fact, the simple slope of the line through the scatterplot is positive, indicating that steeper cuts in corporate rates (the farther to the left of zero) were associated with slower wage growth (slightly and insignificantly, to be sure, as rate cuts just don’t affect wages much).

Figure D

The authors misrepresent research findings on corporate tax rates and wages

After failing to demonstrate clear evidence of a strong link between corporate tax changes and wages, CEA (2017) provides a clearly cherry-picked review of the academic research to claim that most economic evidence shows that the bulk of corporate tax cuts would raise wages. This claim is obviously untrue; most researchers who have studied corporate taxes and wages believe that the benefits of corporate rate cuts will accrue more heavily to capital incomes than to wages because the “incidence” of a corporate tax—where its economic burden is felt—falls more heavily on capital incomes than on wages.5 This clear majority view is why organizations that have a professional obligation to accurately forecast economic and revenue trends—organizations such as the Congressional Budget Office (CBO), the Department of Treasury Office of Tax Analysis (OTA), and the Tax Policy Center (TPC)—all allocate the vast majority (from 75–80 percent) of the incidence of corporate taxes to capital incomes, not wages.

A full literature survey including the studies cited by the CEA (2017) is provided in Gravelle (2017). It is clear from Gravelle’s comprehensive review that CEA (2017) has been extremely selective regarding which studies from the literature to cite, highlighting only those that provide large estimates of wage gains from corporate tax cuts and ignoring the clear fact that these studies are by and large lower-quality than studies finding much smaller wage effects.

While a blow-by-blow review of the professional debate over the robustness of regression results is beyond the scope of this report, it is possible to identify two examples of how the CEA inappropriately characterized some of the studies that it claims support its policy.

First, CEA 2017 cites estimates of large economic gains stemming from tax reform made by Auerbach, Kotlikoff, and Koehler (AKK, henceforth) (2017). But AKK 2017 actually assessed a previous tax proposal (the Congressional Republican “Better Way” plan). Crucially, the element of the previous proposal that drives the large economic gains in AKK (2017) is not included in the “Unified Framework.”6 Hence citing AKK (2017) in the current debate is actively misleading.

Second, CEA 2017 cites numerous papers in support of the proposition that firms share “rents” (excess profits) with workers, and claim from this that anything that boosts firms’ profits (like cutting corporate tax rates) will hence boost wages. But profit rates have been historically high in recent years, and yet wage growth remains low, largely because workers’ leverage in claiming such excess profits has been severely eroded by a range of nontax policy choices.7

And as we noted earlier in this report, the introduction to the CEA 2017 paper highlights the breakdown in the relationship between increased profits and wage growth—with this breakdown coming exactly during a time when corporate tax rates were significantly reduced.

In the CEA report, improving “competitiveness” through corporate tax cuts means increasing the trade deficit

For corporate tax cuts to produce very large wage increases, a key assumption would have to hold. In theoretical models, corporate rate cuts have the potential to boost wages only when flows of international capital respond incredibly robustly to any small change in American interest rates.8 In the jargon, this is assuming that the U.S. is a “small, open economy” and its wages, prices, and interest rates are wholly set on global, not domestic, markets. Were this extreme “open economy” assumption correct, as corporate rates are cut and post-tax profits rise, an enormous flood of savings from abroad would enter the U.S. economy and be put into productive capital investments. This inflow would continue until a rising capital stock pushes down pre-tax profit rates enough to move post-tax profit rates back towards global averages.9

There are three issues that are important to flag about this process. First, the U.S. is not a small, open economy, and domestic influences matter greatly to domestic prices, wages and interest rates.

Second, an inflow of capital into the United States requires we run a larger trade deficit. Claims are often made that cutting corporate tax rates will improve the “competitiveness” of the U.S. economy. To the degree that “competitiveness” has any economic meaning at all for most laypersons, it likely means the United States having more balanced trade, not larger trade deficits.10 Larger trade deficits would displace jobs from the manufacturing sector disproportionately, an outcome that would seem to be at odds with Trump administration promises to revive this sector.

Third, over time, a larger trade deficit and inflow of foreign savings implies a steady transfer of ownership of American assets to foreigners. Again, it seems odd to claim that American “competitiveness” would be improved by a policy that handed American assets to foreign investors to finance an excess of imports over exports.

CEA report misrepresents the problems of “profit-shifting”

Finally, the CEA (2017) claims that allegedly high U.S. corporate tax rates have led to profit-shifting abroad.11 The authors write, “In general, profits earned abroad evidence the willingness of U.S. firms to invest in production and business operations overseas, at the expense of domestic investment.”

This is clearly wrong. The bulk of high-quality evidence on the very real problem of profit-shifting indicates that actual investment and employment is not shifting abroad due to tax differentials. Instead financial engineering is making profits appear to have been earned abroad, so that business owners can maximize the benefits of having profits appear in tax havens.12 Nobody really thinks the Cayman Islands is a global manufacturing powerhouse, yet a stunning share of the world’s profits are booked there through financial and accounting engineering. CEA (2017) notes studies showing that this profit-shifting of obviously fictitious economic activity has led to mismeasurement of economic activity occurring within the United States; accounting for this profit-shifting shows that GDP in the United States is larger than our national accounts currently indicate, by roughly 2 percent.13 Yet the CEA (2017) misleads readers into thinking that ending profit-shifting would actually increase U.S. GDP and create jobs, rather than just solve a measurement problem.14

To clarify the difference between activity and measurement of that activity, imagine that you have an hour to drive 60 miles. For the first 30 minutes your speedometer registers 50 miles per hour with the accelerator floored. You despair of reaching your destination in time. Then your mechanic friend traveling with you notices something wrong with your speedometer and bangs on the dashboard to fix it. Now with the accelerator floored your speedometer registers 70 miles per hour. Your actual speed hasn’t increased. You would have made it to your destination well in time regardless of what your speedometer was telling you. Better measurement is nice, but it has not made the car go any faster. One imagines that the authors of the CEA report know that promises of faster growth in this context are deeply misleading, yet they make them anyway.

The fact that profit-shifting is about accounting tricks rather than real economic trends is affirmed in the CEA’s own report, in Figure 3 (CEA 2017), which shows the percent of overseas profits of U.S.-based multinationals held abroad. The share declines precipitously in 2004, falling by 20 percentage points (roughly a third). Was there a flood of factory “insourcing” in 2004? No, but there was a one-year “repatriation holiday” that allowed firms to repatriate profits held abroad at a preferential tax rate. The response was totally predictable—profits flowed quickly home and yet job and GDP growth barely registered.15

Conclusion

Mishel and Eisenbrey (2015) highlight a number of policies to tackle slow wage growth. They also usefully distinguish between policies that would work and those that wouldn’t. Corporate tax rate cuts absolutely belong on the list of fake solutions to the slow wage growth bedeviling typical American workers.

The urge to market corporate tax cuts as wage boosters makes a lot of sense. Americans want faster wage growth and want policymakers to get credit for taking these desires seriously. There is enough in economics textbooks to make the link between corporate rate cuts and wage increases theoretically plausible. But the real-world data couldn’t be clearer: a strategy to boost wages based on cutting the taxes paid by corporations is ridiculous policy. Policymakers who are sincere about boosting wages would heed the advice of Mishel and Eisenbrey (2015), and undertake policy measures to redistribute economic leverage and bargaining power away from capital owners and corporate managers and back to low- and middle-wage workers.

The Trump administration has so far done worse than ignore this insight about leverage and bargaining power. Trump and his team have instead tried along multiple dimensions to continue to redistribute economic power from typical workers to capital-owners and corporate managers, as documented in EPI (2017). Given that the administration has weighed in so heavily against workers in policy fights over the past year, it’s not surprising to find it pushing a tax plan that would provide nothing for these workers, either.

Appendix 1: Replicating CEA (2017) Figure 1

As noted in the text, CEA (2017) shows wage growth from 2013 to 2016 for two groups of OECD countries: those with the 10 highest and 10 lowest statutory corporate tax rates.16 Given that it is such a short period and that no corporate rate changes are identified, it is essentially a near-worthless graph. Nevertheless, we replicated it just to examine what could be driving the results (results are available upon request). What we found is reported in this EPI paper: the results are largely driven by three very small economies that happened to have fast wage growth in 2015 and 2016.

Since the CEA does not identify them, we provide the list of the highest and lowest statutory tax rates below.

The countries with the lowest averages rates from 2012 to 2016, ranked from lowest to highest, are Ireland, Latvia, Slovenia, the Czech Republic, Hungary, Poland, Iceland, Turkey, Estonia, and the United Kingdom.17 Because Turkey does not have earnings data through 2016, we instead used the country with the next-lowest rate on the list: Finland.

For both 2012–2016 and 2013–2016, the 10 highest statutory corporate tax rates in the OECD are in Luxembourg, Australia, Mexico, Germany, Portugal, Italy, Belgium, Japan, France, and the United States.

About the author

Josh Bivens joined the Economic Policy Institute in 2002 and is currently the director of research. His primary areas of research include macroeconomics, social insurance, and globalization. He has authored or co-authored three books (including The State of Working America, 12th Edition) while working at EPI, edited another, and has written numerous research papers, including for academic journals. He often appears in media outlets to offer economic commentary and has testified before the U.S. Congress. He earned his Ph.D. from The New School for Social Research.

Endnotes

1. A shift from wages to profits is just one channel through which economic growth can bypass typical workers’ wages. Another channel is redistribution within the wage “bill” that companies pay for all their workers—CEOs’ salaries exploding while typical workers’ pay stagnates, for example. Much research, such as Bivens and Mishel (2015), highlights that this within-wage-bill redistribution has been the single-biggest factor in driving growing inequality in recent decades, and that its role was particularly large in the 1980s.

2. See Rachel and Smith (2015) for evidence on these secular trends in global interest rates.

3. See Table 1 in Bivens and Blair (2017) for this ranking of fiscal policy changes by their effect in spurring growth in aggregate demand.

4. The authors provide essentially no documentation in their report for this figure. In the appendix we are able to very closely match the figure using data from the Organization of Economic Cooperation and Development (OECD), but due to the nonexistent data documentation in their report, very slight differences between our graph and theirs might remain.

5. For example, sales taxes can be officially levied on makers of cigarettes, but it is almost surely the case that consumers of cigarettes would end up bearing the burden (“incidence”) of such a tax, as prices of cigarettes rise to pass on the value of the tax.

6. Specifically, the feature of the “Better Way” plan that drove the findings in Auerbach, Kotlikoff, and Koehler (AKK 2017) was the “destination-based cash-flow tax” (DBCFT) as a replacement for the current corporate income tax. The “Unified Framework” does not include a DBCFT and only includes cuts to rates of the current corporate income tax.

7. For a discussion of some of these policy choices, see Bivens et al. (2014).

8. See Gravelle (2017) for the various other assumptions that can affect the incidence of corporate income tax rates.

9. The standard assumption in macroeconomics is that as the size of a nation’s capital stock rises, the marginal return to each increment of capital investment falls, pushing down the profit rate.

10. Bivens and Blair (2017) provide a relatively thorough overview of the economics of corporate tax cuts and claims regarding “competitiveness.”

11. See Bivens and Blair (2017) for why U.S. effective rates are actually not particularly out-of-line with advanced country peers.

12. See Clausing (2016) and Zucman (2014) for evidence on this profit-shifting stemming from accounting engineering.

13. See Guvenen et al. (2017) for this estimate and its derivation.

14. To be clear, much about globalization and the ability to substitute foreign production for U.S. production has harmed American workers. But this process has not been driven by tax rates.

15. See Huang and Marr (2014) for a good review of the evidence on the economic effects of the 2004 repatriation holiday.

16. As always, it is worth noting that statutory rates and effective rates (or what corporations actually pay after loopholes and deductions are used) can be very different. As Bivens and Blair (2017) have noted, the U.S. effective rate is much closer to international norms than its statutory rate.

17. CEA (2017) is not totally clear whether its analysis looks at 2012–2016 or 2013–2016 averages for corporate tax rates. The report says, “Between 2012 and 2016…”, but the data in Figure 1 begins in 2013. If we instead calculate countries’ tax rates between 2013 and 2016, the United Kingdom drops out and is replaced by Switzerland. No real change results to the wage growth figures.

References

Auerbach, Alan, Lawrence Kotlikoff, and Darryl Koehler (AKK). 2017. Assessing the House Republicans’ “A Better Way” Tax Reform.

Bivens, Josh, and Hunter Blair. 2017. Competitive Distractions: Cutting Corporate Tax Rates Will Not Create Jobs or Boost Incomes for the Vast Majority of American Families. Economic Policy Institute.

Bivens, Josh, Elise Gould, Lawrence Mishel, and Heidi Shierholz. 2014. Raising America’s Pay: Why It’s Our Central Economic Policy Challenge. Economic Policy Institute.

Bivens, Josh, and Lawrence Mishel. 2015. Understanding the Historic Divergence Between Productivity and Typical Workers’ Pay: Why It Matters and Why It’s Real. Economic Policy Institute.

Council of Economic Advisers (CEA). 2017. Corporate Tax Reform and Wages: Theory and Evidence.

Bureau of Economic Analysis. Various years. National Income and Product Accounts Interactive Data. Accessed October 2017.

Bureau of Economic Analysis. Various years. Fixed Assets Interactive Data. Accessed October 2017.

Bureau of Labor Statistics (U.S. Department of Labor) Current Employment Statistics program. Various years. [Interactive tables].

Clausing, Kimberly. 2016. The Effect of Profit Shifting on the Corporate Tax Base in the United States and Beyond.

Gravelle, Jane. 2017. Corporate Tax Reform: Issues for Congress. Congressional Research Service.

Guvenen, Fatih, Raymond Mataloni Jr., Dylan Rassier, and Kim Ruhl. 2017. Offshore Profit Shifting and Domestic Productivity Measurement. National Bureau of Economic Research (NBER) Working Paper No. 23324.

Huang, Chye-Ching, and Chuck Marr. 2014. Repatriation Tax Holiday Would Lose Revenue and Is a Proven Policy Failure. Center on Budget and Policy Priorities.

Mishel, Lawrence, and Ross Eisenbrey. 2015. How to Raise Wages: Policies That Work and Policies That Don’t. Economic Policy Institute.

Organization for Economic Cooperation and Development (OECD). Various years. OECD.Stat interactive database. Statutory corporate tax rates. Accessed October 2017.

Organization for Economic Cooperation and Development (OECD). Various years. OECD.Stat interactive database. Average annual wages. Accessed October 2017.

Rachel, Lukasz, and Thomas Smith. 2015. Secular Drivers of the Global Real Interest Rate. Working Paper, Bank of England.

Zucman, Gabriel. 2014. “Taxing Across Borders: Tracking Personal Wealth and Corporate Profits.” Journal of Economic Perspectives, vol. 28, no. 4, 121–148.

Should tax cuts be today’s policy priority?

Most Republican plans, including the new “Big 6” framework released at the end of September, prioritize cutting top income tax rates and rates paid by corporations.1 These rate cuts would lead to huge benefits for the already-rich, but provide just crumbs to low- and middle-income families. For example, the Tax Policy Center estimates that about 50 percent of all benefits from the Big 6 proposal would accrue to the top 1 percent.2 This top 1 percent has seen income growth of 160 percent since 1979, compared with growth of 13.6 percent for the middle 20 percent of families.3 In short, the top 1 percent doesn’t need a tax cut, yet this is exactly the group that Republican tax plans aim to help.

Importantly, the problem for vast majority of American households has not been what taxes have taken out of their paychecks in recent decades, but what employers have not been putting into these paychecks.

Taxes are not the reason why low- and middle-income households have seen weak income growth in recent decades. Effective federal tax rates for the bottom 80 percent of households have fallen dramatically since 1979.4 Despite these lower taxes, income growth has been anemic because of a range of intentional policy decisions that have shifted economic power away from low- and moderate-wage workers toward capital-owners and corporate managers.5 Tax cuts for the rich would just further direct resources to the top of the income distribution, and would also provide even greater incentive for capital-owners and corporate managers to rig the economic rules to send more income their way.6 Solving the problem of degraded economic leverage leading to near-stagnant pay for the broad middle class should be the economic priority of Congress.7

Finally, tax cuts will reduce federal revenues in coming years at a time when we will need greater revenues to honor existing federal commitments to provide health care for Americans.

The federal government is the single largest payer of health care costs in the economy, and these health care costs have grown faster than overall economic growth for decades. The federal health programs—Medicare, Medicaid, and the Affordable Care Act—are efficient and do a better job at containing costs than private insurance.8 Cutting these programs would be inefficient and, worse, just shift health care costs onto American household budgets. In short, Medicare, Medicaid, and the ACA are valuable investments that we should finance, not starve of revenue.

Would cutting corporate tax rates boost American jobs?

In an economy constrained by too-slow spending (or a lack of aggregate demand, in economists’ jargon), tax cuts can in theory boost demand by raising (post-tax) incomes and inducing households to spend more. But the bulk of corporate tax cuts would benefit the richest Americans, and these households are far less likely to spend an additional dollar for every dollar in tax cuts than low- or middle-income households. To put it simply, spending of rich households is not constrained by too-low incomes, so giving them more income does little to induce more spending.

If Congress wants to spur demand and create jobs with fiscal policy changes, it should either target tax cuts at low- and middle-income families, or boost spending directly. This recommendation is clearly borne out by all serious economic evidence: in a ranking of fiscal policy changes based on bang for the buck—how many jobs they create—corporate rate cuts are near the bottom of the list.9

Would cutting corporate tax rates boost American investment or wages?

If the economy’s growth is not constrained by too-slow spending, then there is a theoretical case that corporate rate cuts could boost growth by encouraging investments that increase the economy’s productive capacity (“supply side” effects). However, today’s real-world data indicate strongly that this theoretical case will fail.

The argument that corporate rate cuts would boost investment in plants and equipment depends on a long chain of influences. Here is how it would work theoretically. First, by boosting the post-tax return to owning capital like stocks and bonds, the rate cuts induce households to save more. Next, this increased supply of savings drives down economy-wide interest rates. This fall in interest rates then induces firms to borrow more to invest in plants and equipment. The new plant and equipment investments give workers better tools to do their jobs, boosting productivity and thus (as many assume) mechanically boosting wages.

But nearly every link in this chain fails when faced with today’s real-world data. For one thing, post-tax corporate profit rates remain historically elevated, down just a bit from the historical peaks they hit in recent years.10 Yet these higher rates have not been associated with rapid investment in plants and equipment in recent years. For another thing, we don’t currently have a situation in which deficient savings is leading to high interest rates and thus depressing investment. Corporate savings are high11 and interest rates remain extremely low12 relative to historical data. The combination of low interest rates and low investment with high profit rates signals extraordinarily strongly that the constraint on investment is sluggish demand, not insufficient savings. This means that policy changes that reduce spending (consumption) to boost savings are actually likely to slow growth, not boost it.

And there are even more fundamental problems with the logic of the “tax cuts will boost savings” link in the chain. While corporate rate cuts can boost household savings, they unambiguously reduce public savings by increasing the federal budget deficit. This makes their effect on total national savings (the relevant measure for influencing interest rates) a wash at best. So corporate rate cuts alone will not boost savings unless paired with spending cuts or other tax increases.

Finally, even if insufficient savings were the problem and somehow corporate tax cuts did boost plant and equipment investment and boost productivity, this still doesn’t guarantee that wages for the vast majority of American workers would rise. Wages for the vast majority of U.S. workers stopped rising in tandem with productivity decades ago.13 Workers are more valuable but companies aren’t paying them more. The disconnect between productivity growth and wage growth is the result of a set of intentional policy decisions that have eroded the bargaining power of workers.14 Cutting corporate tax rates is not the solution that will reverse this trend.

Is it a problem that tax cuts (including corporate rate cuts) add to the federal budget deficit?

Proponents of tax cuts for rich households and corporations often claim that they would boost investment, productivity, and wages. But this would only be true if the tax cuts (particularly the cuts on capital incomes) boost savings, drive down interest rates, and encourage corporations to invest in plants and equipment. But even if the tax cuts were to spur an increase in household savings, they would also unambiguously reduce public savings by increasing the federal budget deficit. So tax cuts by themselves cannot work the way their proponents claim—the cuts need to be offset with either increases in other taxes or spending cuts to neutralize their effect on public savings. This fact is why honest efforts to “dynamically score” plans like the recent “Big 6 proposal” backed by the Trump administration routinely find the plans will actually reduce growth and job creation.15

Given today’s real-world data, it is clear that federal budget deficits are not a pressing economic problem now and are not likely to be a problem in the short- or medium-term.16 The U.S. economy’s fiscal position is fundamentally solid. Long-term interest rates and inflation remain low. But if tax cuts for the rich feed the “deficit hysteria” that infects so much of Beltway policymaking, this would pose a problem. In today’s economy of slack demand, anything that convinces policymakers to cut spending on valuable programs will not only hurt the families who rely on those programs but drag on growth and prolong the years-long failure to return the economy to genuine full employment..

Do U.S. corporations pay significantly more in income taxes than companies in our peer countries?

While the statutory U.S. corporate tax rate of 35 percent is on the high end internationally, corporations don’t actually pay anywhere near that rate on average. Using loopholes to avoid paying their full tax bills, corporations pay an effective tax rate of between 12.5 percent and 21.2 percent.17 One of the key loopholes is deferral—which allows U.S. firms to pay zero taxes on profits booked overseas (often through clever accounting practices) unless and until those profits are “repatriated” (returned) to owners in the United States.

Measured as a share of total GDP, U.S. corporations pay significantly less than their international peers. In 2015, the revenue raised through U.S. corporate taxes equaled 2.2 percent of GDP. On average, other member countries of the Organization for Economic Cooperation and Development (OECD) raised 2.9 percent of GDP through corporate taxes.18

Does the U.S. corporate tax code harm American workers by making U.S. firms less “competitive”?

While cutting U.S. corporate rates would render U.S. corporations more profitable, these cuts would do nothing to boost jobs or wages for American workers—through increased “competitiveness” or any other channel. U.S. corporate profits are historically high and yet U.S. corporations aren’t investing a lot more in plants, research, and new technology.19

Key to understanding why this competitiveness argument is a pure dodge is the fact that the United States taxes firms on a worldwide basis, meaning that profits are taxed at the same rate whether they’re booked domestically or internationally. So, cutting corporate tax rates would just reduce the rates U.S. firms pay on profits here and abroad, which does nothing to encourage corporations to set up plants here in the United States. Not only that, the deferral loophole allows U.S. firms to avoid paying taxes on profits booked overseas until profits repatriate to the firms’ owners in the United States. Because the deferral loophole encourages corporations to keep accounting profits overseas, one obvious way to improve the “competitiveness” of the U.S. corporate tax code is to reduce the share of corporate profits appearing overseas by ending deferral and requiring that corporations pay their taxes when the income is earned—just like American families do.

Finally, some purveyors of the “competitiveness” argument imply that U.S. corporations might do better in claiming global market share against foreign corporations if our corporate rates were cut. But this would only be true if corporate rate cuts somehow translated into lower prices for the output of American firms, and no serious economist thinks this would happen. All in all, claims that U.S. corporate rates should be cut in the name of boosting American competitiveness are economic snake oil.

Does the U.S. corporate tax code force businesses to move their headquarters overseas? Even if it did, is this necessarily bad for American workers?

Current U.S. tax laws are already outrageously generous to tax-dodging multinational corporations. Under the deferral loophole, firms avoid paying taxes indefinitely by using accounting tricks to make profits appear to have been booked in subsidiaries overseas.

Deferrals are encouraged by the prospect of ad hoc “tax holidays,” when the U.S. government gives companies that bring profits back to the U.S. in a given year a deep discount on their tax bill. For example, in 2004, legislation passed by Congress allowed companies to pay just 5.25 percent on repatriated profits, dramatically lower than the 35 percent statutory tax rate. But there hasn’t been a tax holiday on deferred overseas profits since 2004, and this has made some companies with huge offshore profits worried that they might actually have to pay the full taxes they owe on all the profits they’ve stashed overseas.

Instead of waiting and risking a future Congress that changes tax law to actually collect the full amount of taxes owed on overseas profits, some of these companies are engaging in the do-it-yourself permanent tax break known as an “inversion.” In an inversion a U.S. multinational is “bought” by a foreign company that is small enough that the original corporation can still retain managerial control over the new company. The new, now ostensibly foreign company then uses accounting gimmicks to ensure that its U.S. tax bill is zero.

But these firms generally do not move productive plants and equipment and jobs overseas; instead, they just move paper profits. To put it simply, U.S. manufacturing jobs are not moving to tax havens such as Ireland or the Cayman Islands, accounting profits are moving there and avoiding taxes, and that’s the key problem we should try to solve with corporate tax reform.

Inversion is clearly nothing but a strategy to dodge taxes. In 2016, the Obama administration clamped down on one loophole that multinationals use to claim tax savings once they’ve inverted. Lo and behold, a planned inversion by Pfizer was immediately halted.20 There’s no point in pretending you’re being bought if you’re just going to have to pay your taxes anyway.

Do small business owners need a tax cut to level the playing field with larger corporations?

Small businesses in the United States are not taxed at the business level, while corporations are. Instead, owners of small businesses pay taxes on the profits they make when they pay individual income taxes, as do owners of corporations (shareholders) when these corporations return business profits to them in the form of dividends or capital gains. This means that owners of small businesses are not disadvantaged relative to owners of corporations by the American tax code.

Further, capping the rate applied to “pass-through” income (income returned to owners of businesses that are not taxable corporations) declared on individual tax returns at 25 percent—as the “Big 6 proposal” does—would only help those business owners who net more than $250,000 per year in business income after expenses. Such business owners constitute well under 3 percent of tax filers. In short, what is generally advertised as a cut to “small businesses” is just one more cut to the richest households, particularly those who hire good accountants to make their individual income appear to be pass-through income.

To be clear, there are plenty of nontax policies that should be undertaken to help small businesses, particularly policies that would allow them to compete more effectively with corporations. Robust competition policy that restrains the power of monopolies would be a huge boon to small businesses. And small businesses would benefit greatly from macroeconomic policies (such as federal spending and continued low interest rates) that finally restored the economy to genuine full employment by boosting aggregate demand.

In summary, small businesses don’t pay taxes at the business level, corporate rate cuts will not help them, and cuts to top individual tax rates or to rates on capital income earned by individuals is much more likely to benefit the owners of corporations than the owners of small businesses.

Do U.S. corporations need tax cuts to resolve economic “uncertainty” that is supposedly holding back U.S. growth?

Blaming slow growth on uncertainty is a smokescreen. If members of Congress truly believed that “uncertainty” were stymieing growth, they could pass a resolution assuring corporations that absolutely no new tax cuts would be forthcoming. “Certainty” then is not what corporations are really looking for. What they’re really looking for are tax breaks.

Wouldn’t tax simplification be a good idea?

Taxes are not complex because of progressivity or multiple rates. Taxes are complex because of the multiple deductions, exemptions, and credits taxpayers can claim. True simplification would mean radically reducing the number of deductions, exemptions, and credits, not reducing progressivity and compressing rates. (For taxpayers who make the bulk of their taxable income from wages or Social Security benefits and who take the standard deduction, income taxes are in fact simple.) But the plans Republicans have introduced are all about reducing progressivity and compressing rates and have next to nothing in them about reducing loopholes. Take one example: the “tax postcard” that House Speaker Paul Ryan likes to trot out at town hall events.21 The second line of his postcard instructs taxpayers to write down “1/2 your investment income.” But what does investment income include? Presumably there are separate and not-so-simple forms and worksheets for calculating this. And why is this line needed at all? Because under the Ryan plan, investment income is taxed at a preferential rate relative to earned income; in short, it preserves one of today’s largest loopholes while reducing progressivity.

Shouldn’t we close loopholes in the corporate tax code?

According to the corporate tax code, companies can defer paying taxes on profits indefinitely if those profits are assigned to foreign subsidiaries. They are not required to pay taxes to the U.S. government until those profits are “repatriated” (returned to the parent company in the United States). Through creative accounting practices, companies make their profits appear in low-tax countries (“tax havens”) on paper, even though they may be engaging in little or no actual economic activity in those countries.22

Closing corporate loopholes means, most importantly, closing the deferral loophole. But Republican tax plans would make this loophole permanent, by moving the corporate tax code to a “territorial” system that permanently moves the tax rate on foreign-booked profits to zero.

Tax plans that do propose ending loopholes often pair this with cuts to the statutory rate—as if to say to corporations, “don’t worry that we’re increasing your taxable income; we’ll offset that by taxing it all at a lower rate.” But closing loopholes is a good idea in and of itself precisely because it broadens the tax base and makes higher rates even more effective in raising revenue. The goal should not be to neutralize the impact on corporations; it should be to restore lost tax revenues. Indeed, loophole-closing would ideally be complemented by raised rates, not counterbalanced by lowered rates.

Are profits of U.S. firms “trapped” overseas because of U.S. corporate taxes?

Corporate profits are sitting overseas because corporations are hoping for another tax holiday, like the one they were given by Congress in 2004. During the 2004 tax holiday, multinational corporations were able to pay a tax rate of 5.25 percent on repatriated profits, instead of the 35 percent rate they were supposed to pay.

As corporations await another tax holiday windfall at the expense of the American people, they aren’t financially handicapped in any way by leaving these profits overseas, since they can tap these profits through pretty basic financial engineering. They can borrow at low rates, using their offshore profits as implicit collateral, and then deduct that interest from their income. The net result of these financial maneuvers is a wash to their profits, but in return they essentially get access to their overseas holdings without paying the taxes they owe. Apple has $230 billion offshore but borrowed $6.5 billion to repurchase stocks and boost shareholder returns. Microsoft has $124 billion offshore but borrowed $26 billion to buy LinkedIn.23

Let’s end with an analogy. Every dollar your employer pays you triggers a tax liability for them (the employer-side of the FICA taxes that fund Social Security and Medicare). Imagine one day your employer came to you and said that they’d love to pay you your salary, but, sadly, the money is “trapped” because if they did pay, they’d then owe taxes. Would you find this a compelling argument? Or would you tell them to shut up and pay their taxes?

Would letting companies bring back (“repatriate”) their overseas profits at low tax rates (via a “tax holiday”) help the U.S. economy?

For example, Apple has $230 billion offshore but recently took on $6.5 billion in debt to repurchase stocks and boost its share price, allowing owners to realize a potential capital gain. Microsoft has $124 billion offshore but borrowed $26 billion to buy LinkedIn.24

When a tax holiday was implemented in 2004, there were rules in place that were supposed to ensure the money was invested. Multinational corporations got around those rules, and studies show that the offshore profits went to shareholders.25

Finally, we know that savings are plentiful and interest rates are historically low. This means that corporations are already well positioned to invest in productivity-enhancing capital that could boost wages. The benefits of on-shoring a lot more corporate savings through a tax holiday would not solve the main problems the economy currently has; instead it would simply lock in a tax cut for corporations.

Will tax cuts threaten Social Security, Medicare, Medicaid, and the Affordable Care Act (ACA)?

While the pressure to cut spending on these programs in the near term stems almost entirely from politics, not from economic reality, 26 the threat that political pressure will prevail is very real. Historically, increased deficits have been leveraged politically to push the idea that spending must be significantly restrained, and sooner rather than later. Large tax cuts would boost present and projected deficits, and this would surely prompt “deficit hawks” to once again claim we must cut spending on Social Security, Medicare, Medicaid, and the ACA in order to avert a debt crisis. Indeed, such cuts are already being pursued—Republican budgets proposed this year would impose significant cuts to these vital public programs; an increase in the deficit caused by tax cuts would lead to additional pressure for spending cuts.

In the long term—if the economy returns to full employment for a long stretch (making deficit financing costly rather than the free lunch it is during times of economic slack),27—then we will need more revenue, not less, to meet current federal spending commitments, particularly for health care spending. Federal health care spending is a good value, as the federal government has proven itself more efficient at constraining health care costs than the private sector. If private health care growth had mirrored the growth of Medicare, a health care plan that today costs American household’s $15,000 would instead cost $10,000. Because this federal spending is a good value, while of course we should make it as efficient as possible, we should also ensure that we raise enough revenue to continue this spending; plans to slash taxes are inconsistent with this.

Is there a better way to spend the $2.5 trillion to $5.5 trillion in revenue that would be lost under the current “Big 6” tax plan?

As we await a final official “score,” preliminary analyses estimate that the revenue lost due to the Big 6 plan would run from over $2 trillion to over $5 trillion in a 10-year span.28 Given that many members of Congress and the White House seem to think they have found an extra $200–$500 billion in annual resources available to distribute to American households, are there better uses for these resources if the goal is to provide genuine economic security to America’s working families?

The list of better uses for these resources is almost endless. We’ll note just three examples. First, make health care more affordable for American families. Essentially the only valid complaint leveled against the Affordable Care Act (ACA) in recent years is that it can still leave some families with costly premiums and copays that burden them. While families faced significantly higher burdens before the ACA, the subsidies given to families purchasing insurance in the ACA marketplace “exchanges” could definitely be more generous. In 2017 these subsidies totaled $45 billion.29 Doubling these subsidies would only require claiming less than a quarter of the low-end cost of the Big 6 tax plan. Second, finally make the infrastructure investments that have been discussed for years. Recent proposals for infrastructure investments have called for a $1 trillion to $2 trillion commitment over 10 years.30 Spending $150 billion on infrastructure and doubling ACA subsidies would still not even hit the low-end estimates for what the Big 6 proposals would cost. Third, invest in our children. Estimates of the cost of providing high-quality prekindergarten education for every 3- and 4-year-old in America—an investment that would yield enormous returns—hover around $40 billion annually.31 Doubling ACA subsidies, providing high-quality prekindergarten to all 3- and 4-year-olds, and undertaking an ambitious infrastructure proposal would add up to less than half the high-end estimates of the cost of the Big 6 proposal.

Yes, the resources that would be disproportionately given to the top 1 percent under the Big 6 proposal could absolutely be much better spent buying much more security for low- and middle-income Americans.

Endnotes

1. The “Unified Framework for Fixing Our Broken Code,” released by the White House and congressional Republicans Wednesday, September 27, is available on the Washington Post website. For analyses of this and past plans, see Josh Bivens and Hunter Blair, “A Leopard Can’t Change Its Spots,” Working Economics (Economic Policy Institute blog), September 27, 2017; James R. Nunns, Leonard E. Burman, Jeffrey Rohaly, Joseph Rosenberg, and Benjamin R. Page, An Analysis of the House GOP Plan, Tax Policy Center, September 16, 2016; James R. Nunns, Leonard E. Burman, Jeffrey Rohaly, and Joseph Rosenberg, An Analysis of Donald Trump’s Revised Plan, Tax Policy Center, October 18, 2016.

2. Tax Policy Center, A Preliminary Analysis of the Unified Framework, September 29, 2017.

3. Josh Bivens, Principles for the Upcoming Tax Reform Debate: Reject Tax Cuts for the Rich and Fear-mongering about Deficits, Economic Policy Institute, April 20, 2017.

4. Josh Bivens, Principles for the Upcoming Tax Reform Debate: Reject Tax Cuts for the Rich and Fear-mongering about Deficits, Economic Policy Institute, April 20, 2017.

5. For descriptions of the policy measures that have suppressed wages for the vast majority, see Josh Bivens, Elise Gould, Lawrence Mishel, and Heidi Shierholz, Raising America’s Pay: Why It’s Our Central Economic Policy Challenge, June 4, 2014; and Lawrence Mishel and Ross Eisenbrey, How to Raise Wages: Policies That Work and Policies That Don’t, Economic Policy Institute, March 19, 2015.

6. For a description of how cutting top tax rates can provide incentive for powerful economic actors to rig the rules to claim more income growth, see Andrew Fieldhouse, Rising Income Inequality and the Role of Shifting Market-Income Distribution, Tax Burdens, and Tax Rates, Economic Policy Institute, June 14, 2013.

7. Economic Policy Institute, The Agenda to Raise America’s Pay, last updated December 6, 2016.

8. Josh Bivens, Seeing the Big Picture on Health Reform and Cost Containment, Economic Policy Institute, July 27, 2009.

9. Josh Bivens and Hunter Blair, ‘Competitive’ Distractions: Cutting Corporate Tax Rates Will Not Create Jobs or Boost Incomes for the Vast Majority of American Families, Economic Policy institute, May 9, 2017.

10. Josh Bivens and Hunter Blair, ‘Competitive’ Distractions: Cutting Corporate Tax Rates Will Not Create Jobs or Boost Incomes for the Vast Majority of American Families, Figure D, Economic Policy Institute, May 9, 2016

11. Josh Bivens and Hunter Blair, ‘Competitive’ Distractions: Cutting Corporate Tax Rates Will Not Create Jobs or Boost Incomes for the Vast Majority of American Families, Figure E, Economic Policy Institute, May 9, 2016

12. Board of Governors of the Federal Reserve System (US), 10-Year Treasury Constant Maturity Rate [DGS10], retrieved from FRED, Federal Reserve Bank of St. Louis; https://fred.stlouisfed.org/series/DGS10, September 27, 2017

13. “The Productivity-Pay Gap,” Economic Policy Institute, updated August 2016.

14. Josh Bivens, Elise Gould, Lawrence Mishel, and Heidi Shierholz, Raising America’s Pay: Why It’s Our Central Economic Policy Challenge, Economic Policy Institute, June 4, 2014

15. Benjamin R. Page, Dynamic Analysis of the House GOP Tax Plan: An Update, Tax Policy Center, June 30, 2017

16. Josh Bivens, Principles for the Upcoming Tax Reform Debate, Figure D, Economic Policy Institute, April 20, 2017.

17. Hunter Blair, Frank Clemente, and Nick Trokel. Corporate Tax Chartbook: How Corporations Rig the Rules to Dodge the Taxes They Owe, Economic Policy Institute and Americans for Tax Fairness, September 19, 2016.

18. Organization for Economic Cooperation and Development (OECD), “Taxes on Income, Profits and Capital Gains of Corporates,” OECDStats website, accessed September 2017.

19. Josh Bivens and Hunter Blair, ‘Competitive’ Distractions: Cutting Corporate Tax Rates Will Not Create Jobs or Boost Incomes for the Vast Majority of American Families. Economic Policy Institute, May 9, 2016

20. Caroline Humer, “Obama’s Inversion Curbs Kill Pfizer’s $160 Billion Allergan Deal,” Reuters, April 5, 2016

21. Roberton C. Williams, “Ryan’s Deceptively Simple Promise of Postcard Tax Filing,” TaxVox (Tax Policy Center blog), June 27, 2016.

22. See Josh Bivens and Hunter Blair, ‘Competitive Distractions’: Cutting Corporate Tax Rates Will Not Create Jobs or Boost Incomes for the Vast Majority of American Families, Economic Policy Institute, May 9, 2017; Seth Hanlon, “Offshore Tax Deferral,” Center for American Progress, March 16, 2011.

23. Institute on Taxation and Economic Policy (ITEP), Fortune 500 Companies Hold a Record $2.6 Trillion Offshore, March 2017.

24. Institute on Taxation and Economic Policy (ITEP), Fortune 500 Companies Hold a Record $2.6 Trillion Offshore, March 2017.

25. Chuck Marr and Cye-Ching Huang, Repatriation Tax Holiday Would Lose Revenue and Is a Proven Policy Failure, Center on Budget and Policy Priorities, June 20, 2014.

26. There is no evidence, for example, that deficits are causing damaging interest rate increases, crowding out private investment, or doing any other economic damage. See Josh Bivens, Principles for the Upcoming Tax Reform Debate: Reject Tax Cuts for the Rich and Fear-mongering about Deficits, Economic Policy Institute, April 20, 2017.

27. Deficit spending during times of full employment can push up interest rates, potentially crowding out private investment. If these deficits finance public investment, however, there is no necessary macroeconomic cost to them. But if transfers are expanded, then these are best financed by revenue, not debt, when the economy is at full employment.

28. Committee for a Responsible Federal Budget, “Big 6 Tax Framework Could Cost $2.2 Trillion,” The Bottom Line (blog), September 27, 2017; Americans for Tax Fairness, Updated Analysis: Trump’s Unpaid-for Tax Cuts May Total $5 Trillion in New Tax Plan [press release], September 27, 2017.

29. Congressional Budget Office (CBO), Federal Subsidies for Health Insurance Coverage for People under Age 65: 2017 to 2027, September 2017.

30. Chuck Schumer, “A Better Deal for American Workers,” New York Times, July 24, 2017; Congressional Progressive Caucus, “Congressional Progressive Caucus and Allies Unveil Principles for Infrastructure and Bold Proposal to Create Millions of Jobs“[press release], May 25, 2017.

31. Robert Lynch and Kavya Vaghul, The Benefits and Costs of Investing in Early Childhood Education: The Fiscal, Economic, and Societal Gains of a Universal Prekindergarten Program in the United States, 2016-2050, Washington Center for Equitable Growth, December 2, 2015.

Economic Snapshot

Due to data limitations, it’s hard to come up with one conclusive rate. But multiple studies with distinct methodologies have found effective federal corporate tax rates that range between 13 and 19 percent— far smaller than the rate corporations are supposed to pay.

Real tax reform would close the deferral loophole and ensure that large multinational corporations cannot continue to dodge the taxes they owe. Instead, the Trump administration has reversed its position on commitments to close the deferral loophole, and their most recent proposal followed congressional Republicans’ plans to institute a territorial tax system, which would no longer tax multinational corporations’ offshore profits at all. At its core, a territorial tax system makes the deferral loophole permanent.

This would cause an enormous revenue loss. In hopes that Congress would pass a repatriation tax “holiday” (as happened in 2004), large multinational corporations have used the current deferral loophole to book $2.6 trillion in profits offshore. The corporate tax base is likely to erode far more if this deferral loophole were made permanent.

The United States could benefit from real tax reform that clawed back the taxes that large multinational corporations have been dodging. Instead, the Trump administration is offering to make the deferral loophole permanent and to open up new loopholes for the rich. If policymakers wanted to help working people through tax reform, they would broaden the tax base by closing loopholes and make corporations pay their fair share.

Introduction and key findings

Tax reform has moved to the center of the policy stage. In recent months, proposals to reform the American corporate tax code have included relatively new and untested ideas that have garnered much of the attention, with the “destination-based cash-flow tax” being the exemplar.1 In the end, however, we predict that calls for corporate tax “reform” will end up where they have too often been in recent years: with loud claims that American corporate income tax rates are too high, and that these allegedly too-high rates somehow hurt American “competitiveness.” Indeed, the recent Trump administration tax proposals provide large rate cuts for corporations.

Claims that current rates are excessive and harmful to American economic performance are untrue. The central problem with the American corporate income tax system is not that it raises too much money; it is that it has become so loophole-ridden that it raises far too little. Reform should focus on increasing, not decreasing, the tax share contributed by American corporations.

This report provides context and evidence for debates about the potential payoff to American families from cutting corporate tax rates. It finds this payoff to be clearly negative for the vast majority of American families. It then assesses some common arguments made by proponents of cutting corporate tax rates. Calls to lower the statutory tax rates faced by American corporations are often justified with claims that these rates render American firms “less competitive” in the global economy. It may seem intuitive to a lay reader that cutting the statutory tax rate faced by American corporations from 35 percent to (say) 20 percent would make them somehow “more competitive,” but both economic theory and data indicate that the competitiveness argument for lower corporate tax rates is completely empty. To be clear—cutting these rates would make corporations more profitable (at least in post-tax terms), but policy needs to focus on larger and more important goals than maximizing corporate profits, like boosting the incomes of typical American families.

Key findings of this report are:

• Claims regarding the economic benefits of cutting corporate tax rates rarely relate these cuts to the three influences that could boost living standards for the vast majority of American households: employment generation, productivity growth, and a more progressive distribution of income. Unless corporate tax rate cuts help boost any of these influences, they will not raise living standards for the vast majority.
  • Cutting corporate tax rate cuts would do very little to boost employment generation. In fact, cutting corporate tax rates ranks as the least effective form of fiscal support for employment generation, since corporate tax cuts primarily benefit rich households—who are less likely to increase their consumption than low- or middle-income households when they receive tax cuts.
  • Corporate tax rate cuts would do nothing on their own to boost productivity. If they were “paid for” with spending cuts or lump-sum tax increases,2 and if the economy were at full employment, then they could theoretically boost productivity. But today’s U.S. economy is not at full employment and proposals to cut corporate tax rates rarely provide such pay-fors.
  • Corporate tax rate cuts will unambiguously redistribute post-tax income regressively. The corporate income tax is a progressive tax, with the top 1 percent of households accounting for 47 percent of the incidence of corporate income tax (CBO 2016).3 Because of this, cutting it would clearly boost post-tax incomes substantially more for richer households.

• Proponents of corporate rate cuts rarely explain how these cuts would affect these three key channels that connect American families’ incomes to taxes. Instead, they often provide misleading and context-free empirical and theoretical claims that cutting these tax rates will somehow boost American “competitiveness.”
  • The most common claim is that U.S. corporate tax rates are the highest in the developed world (and that this adversely affects the “competitiveness” of U.S. companies). While it is essentially true that U.S. statutory rates are higher than those of other countries, the effective rates faced by U.S. corporations (i.e., the taxes they actually pay) are roughly equivalent to the effective tax rates of our large industrial peers: the difference between U.S. average effective corporate tax rate and the weighted average of rates in other advanced economies is less than a single percentage point.
  • As a share of overall gross domestic product (GDP), corporate tax revenues have fallen precipitously relative to past recent decades, from 5.9 percent in 1952 to 1.9 percent in 2015. This fall in the corporate tax burden, despite the historically large profits of recent years, largely reflects the success of U.S. corporations in exploiting loopholes in our current tax system.
  • Many claims about corporate taxes rendering U.S. firms uncompetitive implicitly compare the U.S. with notorious tax havens that impose minimal taxes on global corporations. The idea that we should be letting U.S. tax policy be set by these global tax havens has no serious economic basis, as these tax havens attract investment on paper only.
  • The claim that corporate income faces an unusual burden under the U.S. tax code because it is “double-taxed” is flat-out wrong. Many income flows end up being taxed twice, not just corporate income flows. Further, a large majority of corporate sector income (75.8 percent) is not double-taxed at all, and the share of income escaping any taxation at the corporate level has increased dramatically in recent years.

Economic background: The three determinants of income growth

Any debate about the U.S. corporate income tax system gets deep into the technical weeds pretty quickly. To keep this discussion clear and productive, we focus on three simple questions:

• Would cutting corporate tax rates boost employment generation—that is, would it help Americans who want to work more hours be able to do so?
• Would cutting corporate tax rates boost labor productivity—that is, would it increase the amount of income generated in an average hour of work in the U.S. economy?
• Would cutting corporate tax rates boost the progressivity of income distribution—that is, would it raise (and not lower) the share of economy-wide productivity (income generated) that accrues to the vast majority of American households?

The logic of these questions is simple. Growth in living standards for the vast majority of American households is essentially determined by three things—how much these households work, how much income an hour of work generates on average in the economy, and what share of that average income generated in an hour of work actually accrues to the vast majority of American households. We can label these three influences as employment generation, productivity growth, and income distribution, respectively.4

Any policy change—including corporate tax reform—that is supported by claims that it will boost the living standards of the vast majority of American households must tell a convincing story of how it will (a) generate employment, (b) raise productivity, or (c) distribute income toward the vast majority. Needless to say, any policy change that cannot claim to boost the living standards of the vast majority is not worth doing.

Careful readers will notice that there is not much in these questions about “competitiveness.” That’s because “competitiveness,” particularly as it’s invoked in corporate tax debates, is a near-meaningless concept. It is never defined with any precision, and no link between enhanced “competitiveness” and the incomes of the vast majority of Americans is ever provided. Those following the corporate tax reform debate should be clear that any claimed increase in competitiveness accompanying a cut in corporate tax rates will only redound to the benefit of the vast majority of American workers if it somehow translates into increased employment, higher productivity, or a more progressive distribution of income. As we demonstrate below, this would not be the case.5

The standard analysis of how corporate tax cuts could affect the three determinants of income growth

Much of this report focuses on evaluating specific claims made about U.S. corporate income tax rates. But in evaluating these claims, we continually return to the same question: Is there any relationship between these claims and a goal of influencing income growth for the vast majority (by generating employment, boosting productivity, or promoting a more progressive distribution of income)?

As a foundation for our analysis, we start with some examples of how economic theory predicts that tax cuts—and particularly tax cuts on corporate sector income—would affect these three determinants of income growth for the vast majority.

How would corporate tax cuts affect employment generation?

In the short run, employment generation is primarily influenced by the level of aggregate demand in the economy. The economy only reaches full employment when desired spending by households, businesses, and governments (“aggregate demand”) is high enough to support sufficient hiring to ensure that all workers are getting as many hours of work as they want. If aggregate demand is not high enough to absorb all the potential hours of work available from willing American workers, then the economy will not reach full employment and policy changes that boost aggregate demand can increase employment.

Tax cuts will, all else being equal, boost demand by increasing the post-tax incomes of businesses and households. If the economy is below full employment, then tax cuts can boost employment through their effects on demand. However, very few proponents of cutting corporate income tax rates actually make the argument that boosting aggregate demand through tax cuts will boost employment. There are a couple of reasons why they don’t.

First, in an economy that has already achieved full employment, tax cuts will not boost demand. While disposable incomes and personal consumption would rise following a tax cut, the increase in the federal budget deficit spurred by tax cuts will push up interest rates in a full-employment economy and lead to a reduction in investment in plant and equipment that depresses demand. Before the Great Recession and its aftermath, policy changes were routinely evaluated as if the economy generally spent most of its time at full employment, or as if deviations from full employment were short and rare and could be solved quickly by the Federal Reserve lowering interest rates. While this view that most policymaking can proceed on the assumption of full employment has been (reasonably) shaken by the events of the past decade, most fiscal policy analysis is still done utilizing this assumption, for better or for worse.

Second, even if economic growth is constrained by too-low aggregate demand and employment generation is seen as a problem that needs to be solved by boosting demand (and to be clear, we think this is the case), cutting corporate income tax rates is widely agreed to be among the least efficient forms of stimulus to employment generation. The reason is simple: cutting taxes works to spur aggregate demand and generate employment by increasing consumption spending by households. But boosting consumption by cutting taxes depends crucially on the marginal propensity to consume of the households getting the tax cuts—meaning how much of the tax cut they will turn around and spend instead of save. High-income households have significantly lower marginal propensities to consume than middle- or low-income households. This means that a strategy aimed at cutting taxes to spur consumption should focus on taxes that fall heavily on low- and middle-income households. This does not describe corporate income taxes. The Congressional Budget Office (CBO), for example, assumes that three-quarters of the incidence of corporate income taxes falls on capital owners (shareholders, business owners, and partners, for example). And the top 1 percent of households earns roughly 54 percent of total capital income, while the bottom 90 percent earns just 22 percent. As Table 1 makes clear, cutting corporate income taxes is an extraordinarily inefficient way to boost employment. Increasing government spending or cutting taxes that fall more heavily on low-income households is a much more effective means to that end.

Table 1

How would corporate tax cuts affect labor productivity growth?

There is a better theoretical case that cutting corporate income tax rates could boost labor productivity. But the real-world evidence for this case is extremely weak. Labor productivity is the amount of income generated in an average hour of work in the economy. Labor productivity can grow for one of three reasons: workers become more skilled and/or educated, workers are given more and better capital goods with which to do their jobs (capital deepening), or technology advances.

The case for cutting corporate tax rates to spur productivity hinges mostly on the capital-deepening effect. The economic logic of this case starts with the recognition that corporate rate cuts increase the post-tax return to capital owners’ savings. If, for example, you own shares in General Electric (GE), and if GE faces lower corporate income taxes, GE would have more money available to pay dividends to you and the other shareholders. Because the post-tax return on your savings is higher, you would have more incentive to save your money rather than spend it.

When the economy is at full employment, a boost in savings will translate smoothly into lower interest rates and a resulting increase in capital investment, such as the purchase of a new plant and equipment.6 This increase in investment provides a firm’s workers with more and newer capital goods, hence increasing capital deepening. This in turn boosts labor productivity.

However, while there is a respectable theoretical case for why cutting corporate income tax rates might boost productivity, the real-world evidence argues that this effect would be extraordinarily modest, for two reasons.

First, investment in the U.S. economy has not been constrained by insufficient savings for quite some time. We know this is true because interest rates have been low for years and look poised to remain low for years to come. Given that interest rates are a measure of the price of loanable funds, when this price is historically low it is hard to claim that there is a shortage in the supply of loanable funds (savings).7 Until interest rates rise sharply, there is zero evidence that the U.S. economy is being constrained by a lack of savings.

Second, even if the economy were at full employment and savings were a binding constraint on capital investment, cutting corporate income tax rates in and of itself would not boost national savings. Instead, it would boost private savings, as households and businesses would respond to higher post-tax returns to capital by saving more. But all else being equal, a corporate income tax cut would increase the federal budget deficit, which would reduce public savings and lead to higher interest rates. If corporate income tax cuts were “paid for” in budgetary terms through cuts to government spending, or through tax increases that did not discourage savings, then this policy package might boost productivity through higher savings. But corporate tax rate cuts on their own would not do this, even if the U.S. economy were at full employment.

In summary, the real-world evidence strongly indicates that cutting corporate income tax rates would not significantly boost productivity.

How would corporate tax cuts affect income distribution?

The effect of corporate income tax rate cuts on income distribution is near-unambiguously regressive. The first-round effects of cuts are clearly regressive—analysts typically assume that somewhere between 75 percent and 100 percent of the incidence of corporate income taxes falls on capital owners. In the United States, capital income is quite concentrated at the very top of the income distribution. Figure A shows the share of capital income accounted for by various groups within the income distribution. Roughly 54 percent of all capital income is earned by just the top 1 percent of households, and only 22 percent by the bottom 90 percent. Further, as the figure shows, the concentration of capital income at the top of the distribution has increased significantly in recent decades.

Figure A

Further, the theoretical boost to productivity spurred by corporate income tax rate cuts cannot guarantee a reversal of these poor distributional outcomes. As shown in Figure B, in recent decades the hourly pay of the vast majority of U.S. workers has lagged far behind the growth of productivity as a result of rising inequality.

Figure B

Finally, there remains the issue raised above about how corporate income tax rate cuts are financed. If they are financed with debt in an economy that is at full employment, they will not even raise productivity, so there will be nothing to neutralize their regressive incidence. If they are financed with debt in an economy that is below full employment (as is the case currently), they will boost aggregate demand, but in an extremely inefficient way relative to nearly any other tax cut and especially relative to an increase in government spending. If they are financed with cuts to government spending, their regressive distributional effects will be severely worsened, as the distribution of government spending is quite progressive (see CBO [2013] on this point).8 Finally, even if they are financed with increases in other taxes, it would be hard to neutralize the regressive distributional consequences of corporate income tax cuts, since there are few other taxes that are as progressive as the corporate income tax.

Cutting corporate income tax rates would clearly exacerbate the rise in inequality that has been a primary factor throttling growth in low- and middle-income households’ income in recent decades.

Conclusion: Corporate tax cuts would not benefit the vast majority

This section has made clear that cutting corporate tax rates would not boost living standards for the vast majority of American households. If evidence and logic drove the outcome of policy debates, this should be enough to end the drive to cut corporate taxes. Unfortunately, proponents of corporate rate cuts have managed to confuse this debate with a number of arguments that are wrong, misleading, or irrelevant. The following section examines some of the more common of these arguments.

Analysis of common arguments in favor of corporate tax rate cuts

Proponents of lowering America’s statutory corporate income tax rates rarely provide a crisp, coherent argument linking those cuts to employment generation, productivity growth, or progressive distribution of income. Instead, they rely on a number of odd, mostly meaningless (and often flat-out wrong) assertions about U.S. tax rates and vague notions of economic “competitiveness.” Below, we highlight a number of common claims made by proponents of corporate rate cuts and assess the underlying economics embedded in these claims. What unites most of these claims is that they are economically meaningless, even in those rare instances when the factoids accompanying them are not totally wrong. We sort these claims into two categories—those arguing that the U.S. imposes unusually high corporate tax rates relative to peer countries and that reforms are needed to make the U.S. more “competitive” and to bring profits home from offshore tax havens; and those simply arguing that lowering U.S. tax rates, regardless of what other countries do, will be good for the American economy.

Arguments claiming that corporate tax cuts are needed to make the U.S. more ‘competitive’ with peer countries

Claim: The U.S. has the world’s highest corporate tax rate, hence putting our corporations at a competitive disadvantage with foreign companies.

Response: This is perhaps the single most ubiquitous claim made by proponents of cutting corporate taxes. Below we demonstrate that (1) this claim is empirically false since U.S. corporations do not actually pay higher taxes than foreign companies, and (2) even if it were true that U.S. corporations pay higher taxes, there is no economic channel that would translate a reduced differential between U.S. and foreign corporate tax rates into gains for the vast majority of American households.

This claim is empirically false. It is true that the United States has one of the highest statutory corporate income tax rates in the world. But because the U.S. corporate system is so full of loopholes, the effective rate actually paid by corporations is substantially lower than the statutory rate and is roughly equivalent to the tax rates of our advanced industrial peer countries.

To assess what U.S. corporations are actually paying in taxes, there are two useful rates to consider—the average effective tax rate and the marginal effective tax rate. By both measures there is not much difference between the tax rate levied on U.S. corporations and tax rates levied in other countries.

The average effective tax rate is simply the total of taxes paid by corporations divided by corporate profits. This rate gives us a sense of the differences in relative corporate tax burdens between countries. A theoretically more appropriate measure of the effect of a nation’s corporate tax system on economic decision-making is the marginal effective tax rate. This tells us the effective rate that is faced by the returns on the last dollar of corporate investment undertaken. While this is the more theoretically appropriate rate to monitor, it is a much harder rate to reliably calculate in real time, particularly since it varies by type of investment asset.

Gravelle (2014) surveys the evidence on corporate tax rate differentials between countries. She finds that compared with other large and advanced economies, the U.S. charges similar average and marginal effective tax rates. Gravelle (2014) refers to a PricewaterhouseCoopers report finding that the average effective U.S. corporate tax rate in 2008 was 27.1 percent, while a weighted average of rates in other advanced economies (a group of countries from the Organization of Economic Cooperation and Development [OECD]) in the same year yields an effective tax rate of 27.7 percent. The weights used to construct these averages are based on the size of each economy (this will be important in a later discussion that examines the bases of proponents’ ongoing claims that U.S. corporate taxes are excessively high). Various other measures of the U.S. effective corporate tax rate show a similar story: U.S. corporations face nearly the same average effective corporate tax rates as corporations in other advanced countries.

Gravelle (2014) also calculates marginal effective rates across types of investment assets and combines them to create an overall marginal effective rate estimate. She estimates that, from 2005 to 2010, the overall average annual marginal effective tax rate in the U.S. was 20.2 percent, while a weighted average of other OECD countries’ rates during the same period yields an average annual marginal effective tax rate of 18.3 percent. Since the data in her survey only go up to 2010, some could argue that the data do not account for recently legislated tax changes in foreign countries. However, the data also miss the significant growth in multinational corporate tax avoidance in recent years (this erosion is highlighted below). Without further evidence, it is not clear which of these effects would be larger.

Gravelle’s (2014) findings are generally mirrored, or even strengthened, by other researchers, as is shown in Figure C. A single conclusive data set is hard to come by in the area of effective corporate tax rates, but multiple studies using distinct methodologies put the effective tax rate in the same ballpark as Gravelle’s estimate and suggest far smaller differentials in effective tax rates between the U.S. and peer countries than in statutory rates.

Figure C

For example, Zucman (2014) uses aggregate data to find an effective tax rate paid to U.S. (including federal and state/local) and foreign governments that averages about 19 percent from 2010 to 2013. The effective rate levied by the federal government alone is roughly 12.5 percent. Zucman’s (2014) data include offshore corporate profits that pay little tax due to tax havens and the deferral feature of the U.S. tax code. His profit data are net of losses and profits.

The Government Accountability Office (GAO) focuses on large corporations with positive profits and finds they paid an effective tax rate of about 22 percent between 2008 and 2012, including foreign, federal, and state and local income taxes (GAO 2016). However, the GAO’s data do not take into account offshore profits that face little taxation, possibly biasing their worldwide estimate upward. The effective federal rate levied is 14.0 percent.

Finally, Citizens for Tax Justice (CTJ) finds an effective federal corporate tax rate of 19.4 percent for 288 consistently profitable Fortune 500 corporations (McIntyre, Gardner, and Phillips 2014a). Since this estimate focuses on large profitable corporations, and since their data are taken from corporate reports to shareholders, the estimate is more likely to represent what these corporations actually face, given their large offshore profits that face little taxation because the profits are ostensibly earned overseas. Another report by CTJ (McIntyre, Gardner, and Phillips 2014b) finds an average state effective corporate income tax rate of 3 percent.

Due to different methodologies and data, it is hard to perfectly compare these estimates either with each other or with the statutory rate of 35 percent. But, even with this caveat in mind, Figure C shows a huge gap between estimated effective rates and the statutory rate.

Why does the myth of high U.S. corporate tax rates persist?

Given this clear evidence, how do proponents of corporate tax rate cuts continue to claim U.S. rates are higher than those of our international peers? Generally, they obfuscate the situation in two ways.

First, they repeat data on statutory top marginal tax rates again and again. Gravelle (2014) finds a top U.S. statutory rate of 36.3 percent compared with a 29.6 percent weighted average of other OECD countries. But as we have already noted, this is not a measure of what corporations actually pay; it is a rough measure of the rate they would pay without any loopholes. Since our effective rates are generally similar to those of other advanced economies, the differences in statutory rates simply highlight the extent to which our corporate tax code is riddled with loopholes, particularly for large multinational corporations.

Second, they compare the U.S. effective rates with unweighted averages of the effective rates of our developed country peers. Turning back to Gravelle’s (2014) OECD example, the unweighted average of other OECD countries’ effective corporate tax rates is 23.3 percent, significantly lower than the 27.7 percent weighted average. But using an unweighted average gives tiny OECD tax havens like Ireland, Luxembourg, Netherlands, and Switzerland the same influence on the average effective tax rate as larger economies such as Germany or Japan.

Proponents of cutting tax rates for “competitiveness” reasons argue that tax havens should be included at full weight since their near-zero tax rates attract large foreign investments. But this ignores the fact that these investments are mostly just investments on paper. Clausing (2016) finds, for example, that seven tax havens (Netherlands, Ireland, Luxembourg, Bermuda, Switzerland, Singapore, and the Cayman Islands) hold 50 percent of the foreign profits of U.S. multinational firms, but account for only 5 percent of their foreign employment. In short, the low rates offered by tax havens do not affect economic decisions of multinational firms about where to deploy capital and hire workers; these low rates just affect accounting decisions about how to maximize tax avoidance. Make no mistake about it—the low tax rates in these countries interact with the mammoth loophole that allows U.S. corporations to defer taxes on profits reported abroad, creating a real problem for the United States. But the problem is not that U.S. corporations have moved en masse to these countries (they have not); the problem is that U.S. profits have moved there on paper to exploit the deferral loophole, and this has reduced U.S. tax revenue. The solution to this problem is not to lower U.S. corporate tax rates; the solution is to change the rules of tax accounting to end deferral so that corporations can no longer evade taxes in this way.

Even if it were true that U.S. corporations are paying higher taxes, there is no gain to be had from cutting corporate rate differentials between the U.S. and its peers. The argument that U.S. taxes are much higher than our industrial peers and that this harms us through a “competitiveness” channel is not just wrong empirically; its economic logic is incoherent. It is simply not at all clear how cutting the empirically small differential—or even a larger differential, if there were one—between U.S. corporate tax rates and rates faced abroad would translate into employment generation, productivity growth, or a more progressive distribution of income. Proponents of the argument that rate cuts will boost competitiveness rarely sketch out any economic logic for this claim, but below we hazard a few guesses as to what they may actually be trying to argue.

Does “competitiveness” imply reducing the trade deficit?

This “competitiveness” argument could imply that lowering corporate income tax rates would somehow reduce the U.S. trade deficit. This has often been what “competitiveness” has been taken to mean in past economic policy debates. And reducing the trade deficit would be a good thing for the U.S. economy today. Because the U.S. economy currently has a gap between aggregate demand and the underlying productive capacity of the economy, it has yet to achieve full employment, and any exogenous reduction in the trade deficit would boost this aggregate demand and hence boost employment generation.

But in fact economic theory and evidence do not support the idea that boosting firms’ after-tax profits would lead to a reduction of the trade deficit. Perhaps proponents of corporate rate cuts think that corporate taxes are passed on one for one in the form of higher prices, and thus rate cuts will reduce the cost of U.S. output and make it more competitive in world markets? If so, their thinking is wrong.

First (and least importantly), only a small portion of U.S. output is tradeable (let alone exportable), so cutting taxes on all corporations in the name of fostering price competitiveness for a small subset of firms is a terribly targeted strategy to begin with.

Further, economic theory and evidence provide no support for assigning the incidence of corporate taxes to prices of output; the price of these firms’ output will not fall in response to a cut in corporate tax cuts. And even if something did cause the price of U.S. output to fall, exchange rate adjustments should move to swamp any impact on trade deficits. It is simply not possible to make the link between cutting corporate income taxes and reducing the U.S. trade deficit.

Finally, perhaps some proponents of corporate rate cuts think that higher U.S. rates incentivize U.S.-owned firms to set up production facilities overseas rather than in the U.S., and that this in turn displaces domestic production. But this idea does not have a sound economic basis either—since American firms must pay the same rate on profits earned overseas and those earned domestically when they are returned to the firms’ owners. It is only the possibility of deferring foreign-generated profits that provides any incentive at all for U.S.-based firms to relocate overseas, not any difference in statutory rates. Given this, the solution to this particular incentive pushing U.S. firms offshore clearly should not be to cut U.S. rates, but instead to end deferral.

Does “competitiveness” imply attracting capital from abroad?

Alternatively, claims about enhancing “competitiveness” through corporate tax rate cuts could be implying the U.S. could attract more capital from abroad by increasing the after-tax return to saving in the U.S. relative to other countries. The logic of how this argument boosts productivity follows our introductory example: a higher after-tax return to savings would attract savings from abroad, which would lower interest rates in the U.S. and boost capital investment. But this argument again runs afoul of both empirical facts and economic logic.

First, it’s worth noting that this is the exact opposite of the trade deficit argument made above. The trade deficit and foreign capital inflows into the U.S. are by definition mirror images of each other. Any increase in the trade deficit necessarily implies a reduction in capital inflows and vice versa. So “competitiveness” proponents really should be pressed on what exact argument they’re making here—they can only have one or the other, not both.

Second, as an empirical fact, the U.S. economy attracts more capital from abroad than any other country on the planet, and by a long shot. This can be seen in data on countries’ current accounts (a comprehensive measure of the trade balance) maintained by the International Monetary Fund’s World Economic Outlook Database (IMF 2016). The data are constructed by definition to make a country’s current account the mirror image of the capital account. This means that a current account deficit implies a large inflow of capital into a country (or, a capital account surplus) and vice versa.10 For 2016, the data indicate that the U.S. drew in $469 billion from abroad. This is roughly three times as much as the country with the next-largest current account deficit (the United Kingdom), roughly eight times as much as the third-largest (Canada), and more than 10 times as large as any other country in the world.

Third, as we note above, the extent to which increased availability of savings can boost productivity is quite modest, even when considering any possible “competitiveness” channel of attracting savings from abroad. Gravelle (2014) finds that a 10 percentage point cut in the corporate tax rate is likely to boost output and wages by only 0.18 percent. And even this estimate is probably too high for today’s U.S. economy, which remains clearly constrained by too-low aggregate demand, not too-low savings. Given that it is demand, not savings, that is scarce in today’s U.S. economy, any benefit at all from attracting more savings to the United States in coming years is extremely speculative.

Finally, maybe the “competitiveness” argument is a restatement of the argument that increasing after-tax profits of U.S. companies would boost productivity through the domestic savings channel that we sketched out in the introductory section. But such a claim does not make any sense for this particular argument, because this channel has nothing to do with the relative after-tax profit positions of U.S. corporations compared with foreign companies. It would just imply a level increase in U.S. corporate after-tax profits, with no concern for the after-tax profits of foreign companies.

In conclusion, the claim that corporate rate cuts would aid the U.S. economy because they would make the U.S. more “competitive” by closing large gaps between U.S. rates and rates in peer countries is, first of all, based on inaccurate assertions (there aren’t actually any gaps to close) and, second, lacking a solid economic basis even if such gaps did exist.

Claim: The competitive disadvantage of U.S. corporate tax rates being significantly higher than those of its international peers makes U.S. corporations weaker and more vulnerable to foreign takeovers.

Response: Again, it is simply not true that U.S. corporate tax rates are higher than those of its international peers. Further, the “foreign takeovers” that proponents of corporate rate cuts usually point to are generally those known as “corporate inversions”—which are yet one more scheme to avoid paying U.S. taxes and are not the result of any comparative weakening of U.S. companies in the world market.

The first and sufficient rebuttal to this claim is that it is simply not true that U.S. corporate tax rates are significantly higher than those of its international peers, as we show in the previous section.

Beyond this fact, the “foreign takeovers” that proponents of corporate rate cuts usually point to are generally what are known as “corporate inversions.” A corporate inversion occurs when a U.S. multinational merges with a foreign company to incorporate abroad as a non-U.S. corporation. But the recent spate of well-publicized offshore corporate mergers and inversions has largely been driven simply by an effort to dodge U.S. taxes, not by any comparative weakening of U.S. companies in the world market.

For a concrete example that these inversions have not been about “uncompetitive” American companies, consider the pharmaceutical company Pfizer. Pfizer is a U.S.-based multinational corporation that recently canceled a planned merger with Ireland-based Allergan after the Treasury Department closed certain tax advantages to the merger (Blair 2016).

In the corporation to be formed after the merger, it was Pfizer whose current shareholders would still have owned the majority of the new supposedly “foreign” company. Pfizer’s shareholders would have owned 56 percent of the new company (Johnson 2015). The number 56 percent was no accident. In order to gain the tax advantages that Pfizer was after, Pfizer’s shareholders needed to own less than 60 percent of the new company. But Pfizer certainly did not want to actually become a foreign company, so its shareholders would still need to retain a majority share of the new company.

Recent evidence suggests that we should have expected neither Pfizer’s management nor its workforce to have shifted abroad as a result of it being “taken over” by a foreign firm. Recall that seven tax havens (including Ireland) are responsible for 50 percent of all foreign profits of U.S. multinational firms but for only 5 percent of foreign employment (Clausing 2016). This means that corporate inversions have largely not affected economic decision-making by firms about where to deploy capital and hire workers. Instead, these rate differentials have affected accounting decisions about how to use financial engineering to make profits appear in low-tax havens. Because inversions have generally not led to a loss of jobs and productive capacity from the U.S., but have just led to a loss of tax revenue, responding to them by cutting tax rates makes no sense. The response to the erosion of the corporate income tax base through inversions should be to stop inversions.

Claim: American corporations are forced to keep profits offshore to avoid our high tax rate, and this in turn prevents them from investing here.

Response: There is no evidence that firms would be more likely to invest in the United States if their offshore profits were repatriated. Corporations already have the means and the incentive to increase their investment in the U.S.—domestic liquidity is high, interest rates are low, and profit rates are high—but they are not currently investing the cash they already have on hand (possibly because of demand constraint). The direct evidence—of what companies actually do with repatriated offshore profits—backs this up.

One often hears reports in the press—and not just from clear proponents of cutting corporate tax rates—that American firms’ profits are “trapped” offshore. The corollary claim is often that because their profits are “trapped” overseas, investment and employment in the U.S. are suffering and would be boosted if policymakers could figure out how to induce this “trapped” mass of profits back home. This argument is false in every particular.

The decision of whether to invest in the U.S. depends overwhelmingly upon the expected profitability of this investment. And after-tax corporate profits in the U.S. are extraordinarily high in historic terms. As Figure D shows, the recovery since the Great Recession has been the most profitable time to invest in the U.S. economy in decades, and even seven-plus years into this recovery, post-tax profit rates are high by historical standards.

Figure D

Despite these high profit rates, U.S. companies in general are not currently making new investments. Some may argue that firms see high expected profits but do not have access to the liquid funds they need to actually make the investments that could earn them these profits. Perhaps having profits held overseas come back to the U.S. could relieve this liquidity constraint? This seems unlikely in today’s economy. Besides its large offshore holdings, the U.S. corporate sector has enormous amounts of domestic liquidity in its balance sheets as well—meaning that there is plenty of capital simply from its own retained earnings that could be invested.

Figure E shows the “financing gap” in the nonfinancial corporate sector as a share of fixed investment. This financing gap measures the difference between capital expenditures and the firm’s internal funds to finance it (profits, essentially). When internal funds are almost sufficient to finance all planned investment, the financing gap is small. During the Great Recession and early recovery, this gap went negative for an extended period as firms radically reduced their investment. Even by the end of 2016, however, this gap was extremely small by historical standards, as investment remained weak and profitability quite high.

Figure E

Further, firms can borrow to invest, and the cost of borrowing (interest rates) is also at a historic low. In short, there is no evidence that firms would benefit at all from a repatriation of corporate profits. The reluctance of corporations to invest in the United States is not attributable to lack of available savings; instead, it is due to continued weak demand growth. In this context, the return of offshore profits to the U.S. would most likely just add to a savings glut.

To support this conclusion, we have direct evidence on what has actually happened when multinational corporations were given tax breaks to repatriate offshore profits. In 2004, Congress offered multinational corporations a tax rate of 5.25 percent on their offshore profits if they repatriated them in that year. Multinational corporations and other proponents of the holiday claimed that repatriated offshore profits would be used to invest in the U.S. But in a review of the evidence, Marr and Huang (2014) point out that the Congressional Research Service, the Treasury Department, and other outside analysts have found virtually no evidence this investment occurred. On the other hand, these analysts did find strong evidence that firms used repatriated profits to benefit owners and shareholders. Further, there is little doubt that the 2004 holiday convinced firms to keep profits stashed offshore while their lobbyists work on convincing Congress to pass another holiday. This dynamic is not conducive to ending strategic tax avoidance.

This evidence surrounding the 2004 tax holiday comes as no real surprise. Proponents claim that U.S. multinationals would invest in the U.S. if only they could access their offshore profits. But U.S. investment is weak today, even as it is clearly true that U.S. multinationals are able to access their offshore profits through a variety of creative accounting practices.

Consider recent accounting maneuvers by Apple and Microsoft, who CTJ (2016) has found pay 3 and 5 percent tax rates, respectively, on their offshore profits. Both companies have recently used their offshore profits as collateral for financing debt. But rather than using this financing to boost plant and equipment investment in the U.S., Apple used this debt to finance stock buybacks, and Microsoft has used such collateralized debt to finance the purchases of Skype and LinkedIn.

Anticipation of further tax holidays (including the largest tax holiday of them all, a territorial tax system, discussed below) and the ease with which such profits are clearly accessible tax-free today for measures that return money to shareholders make it unsurprising that profit-shifting abroad has exploded since 2004. Such profit-shifting cost the U.S. as much as $111 billion in 2012 alone (Clausing 2016).

Claim: American corporations are double-taxed on their offshore profits when they bring them home.

Response: This is false. U.S. corporations receive a dollar-for-dollar credit for any foreign taxes paid. There is no double-taxation.

U.S. multinational corporations, like the average worker and like domestic corporations, are expected to immediately pay taxes on their U.S. income each year. However, unlike the average worker, corporations are given a loophole on any income earned offshore, with tax payments deferred until they are repatriated to the parent company in the form of dividends.

This means that by funneling profits into an offshore subsidiary located in a tax haven, multinational corporations can defer paying their taxes indefinitely. When a company decides to pay its taxes, by repatriating those profits, it pay the U.S. rate less foreign tax credits. As a rough example, say the corporation’s profits are located in a country that has a 35 percent tax rate. If it then repatriated these profits, it would face a U.S. tax bill of 35 percent—but would receive a tax credit for the 35 percent it paid abroad. This means that on net it would owe nothing. So no double-taxation has happened. In the far more realistic example where the multinational corporation has located its profits in a tax haven and pays nothing in taxes abroad, that corporation will owe the full U.S. rate of 35 percent upon repatriation.

To see how proponents of lower corporate income taxes are able to reinterpret this latter example as “double-taxation,” consider an example in which a company pays 10 percent on taxes overseas and then repatriates its profits to the U.S. The company is taxed once, at 10 percent abroad. However, when repatriating it faces the 35 percent rate less the 10 percent it already paid. The repatriated income faces a 25 percent tax rate. Since the profits are technically taxed in both countries, some try to argue that this is “double-taxation,” but the total tax bill is exactly the same as it would be if the company were taxed once in the U.S.

Claim: The United States should adopt a territorial tax system—only taxing company profits made in this country—so that American corporations can use the tax savings on foreign profits to invest and create jobs.

Response: A territorial system of taxation is likely the worst policy prescription to come from proponents of “competition,” when considering its effects on employment, productivity, and income distribution. This is because a territorial tax system is likely to have negative effects on all three of these determinants of the living standards of the vast majority.

A territorial tax system basically makes the deferral loophole permanent rather than indefinite, as offshore profits would no longer be subject to U.S. taxes. The incentives for tax avoidance this creates are obvious.

Armed only with the deferral loophole (and well-paid lawyers and accountants), multinational corporations managed to book profits offshore that accumulated to an amount equal to 13 percent of total U.S. GDP by 2016 (CTJ 2016). If these firms knew with certainty that they could avoid taxes forever so long as profits appeared to have been earned offshore, multinational corporations would surely further flood the offshore world with U.S. profits. This would drain the U.S. of needed tax revenues, and there is nothing economically efficient or productivity-enhancing in advantaging multinational corporations over domestic ones.

Aside from the incentives for tax avoidance, a territorial tax system would incentivize moving investment offshore. The logic is clear for a U.S. multinational deciding where to invest—it will face lower rates of taxation if that investment is offshore. In today’s corporate tax system, deferral, not high rates, is what nudges companies to move production offshore. Under a territorial system, this nudge becomes a hard shove. In the long run, this shove could result in less capital investment in the U.S., weakening labor productivity. In the short run, incentivizing multinational firms to invest abroad reduces aggregate demand, therefore weakening employment generation.

Finally, by allowing multinational corporations to easily avoid taxation, territorial taxation would be a boon to the highest-income households, who pay the lion’s share of corporate income taxation. Further, the territorial shift is one that would not help purely domestic firms at all; it would only provide tax advantages for large multinational corporations, likely deepening the regressivity of this shift.

Arguments claiming that corporate rate cuts would be good for the U.S. economy and fairer to corporations

Claim: Cutting corporate tax rates would spur enough growth—and therefore increased tax collections—that the rate cuts would lead to only small revenue losses, or even no revenue losses at all.

Response: Recent history shows that, in general, tax rates and total revenue move in tandem up and down, as would be expected. The argument that somehow rate cuts will not lead to significant revenue losses is a variant of the “Laffer curve” argument. We analyze this argument below and show why empirically there is very little evidence that this argument applies in the current U.S. economy.

Recent decades show that, in general, tax rates and total revenue move in tandem up and down, as would be expected. The argument that somehow rate cuts will not lead to significant revenue losses is a variant of the “Laffer curve” argument, which posits that as rates increase, eventually the economic activity displaced becomes large enough that the total revenue collected actually begins falling. The logic follows that if one were on this portion of the Laffer curve (that is, if rates started at very high levels) then rate cuts could actually boost revenue.

Logically, there is a grain of truth in this. At the extreme, a tax rate of 100 percent really would likely lead to very small tax collections (the incentive to earn income is small when 100 percent is taxed away); there is a theoretical tipping point at which very high tax rates would lead to decreased revenues as described by the Laffer curve. Empirically, however, there is very little evidence that the U.S. economy is anywhere near such a tipping point. In the most recent deep examination of this issue, Diamond and Saez (2011) estimate that the revenue-maximizing top marginal income tax rate is 73 percent. This finding is not out of line with a broader view of the literature. As the entry for “Laffer curve” in the New Palgrave Dictionary of Economics points out, the mid-range estimate for the elasticity of taxable income with respect to the after-tax share is around 0.4—consistent with a revenue peak of about 70 percent (Fullerton 2008). These revenue-maximizing top rates are substantially higher than the top statutory rates in the United States today.

But those levels are focused on the individual income tax side—what about for the corporate income tax? Proponents of corporate tax cuts argue that the peak of the Laffer curve (i.e., the maximum revenue-generating tax rate) is much lower for corporate income taxes than for individual income taxes, citing studies such as Devereux (2006), Clausing (2007), Brill and Hassett (2007), and Mintz (2007). These papers mostly find revenue-maximizing rates around 30 percent (though under certain specifications Clausing’s estimates range up to 57 percent). Gravelle and Hungerford (2012), however, respond to these studies, providing a detailed rebuttal of their findings and estimating much higher revenue-maximizing rates.

At the level of theory, Gravelle and Hungerford (2012) show that even with models based on extreme and implausible assumptions specifically intended to find large effects of tax rates on investment, revenue-maximizing rates for corporate taxes should hover close to the labor share of income in the economy.11 For the United States, this labor share is roughly 75 percent in the corporate sector. At the statistical level, Gravelle and Hungerford (2008) show that empirical estimates of very high responsiveness of investment to tax rates are not robust to even minor changes in specifications. Given this, there is very little evidence that economic activity would increase enough in response to cuts in corporate taxes to neutralize the revenue loss.

Finally, Clausing’s (2007) concluding remarks on the policy implications of such estimates are crucially important. She notes that low revenue-maximizing rates could be driven by firms that are shifting their profits into low-tax jurisdictions or engaging in general tax avoidance. This highlights again that economic decisions may not be much affected by corporate tax rates, but accounting decisions may. But accounting rules can be changed and loopholes closed. In short, low revenue-maximizing tax rates may well simply be a signal that we have allowed corporations and their lobbyists to poke far too many holes in our corporate tax base. This argues for closing the loopholes, not lowering rates.

Claim: U.S. corporations are double-taxed—once at the corporate tax level and a second time at the individual level on dividends and capital gains.

Response: Double-taxation is not a phenomenon that is special to corporations; labor income is also double-taxed. Further, the extent to which this double-taxation inflates average taxes paid on capital income is often wildly overstated. Overall, there has in fact been a massive erosion of taxation on capital income.

The alleged unfairness of double-taxation is often invoked by proponents of cutting corporate income taxes. It is largely a red herring. It is true that capital owners’ income can be taxed twice—once at the corporate level, then again on individual tax returns when it is distributed to them as dividends or capital gains. But labor income is double-taxed as well—facing both payroll taxes and income taxes.

And the extent to which this double-taxation inflates average taxes paid on capital income is often wildly overstated. In a recent paper, Rosenthal and Austin (2016) show that the percentage of corporate stock that is taxable at the individual level (and hence subject to this double-taxation) fell from 83.6 percent in 1965 to 24.2 percent in 2015, largely due to the growth of tax-preferred savings vehicles like 401(k)s and individualized retirement accounts (IRAs).

In fact, combining the decline of taxable corporate stock with the pervasiveness of corporate tax avoidance implies massive erosion of taxation on capital income. Since capital income is heavily concentrated at the top of the income distribution, this has significant consequences for the progressivity of the tax code.

Finally, we should note that many proponents of corporate tax rate cuts have taken to arguing that its real incidence is on labor, pointing to a number of recent studies. These studies have been found to be flawed,12 but if they were taken at face value, this would necessarily imply that corporate profits were not being taxed twice. Yet proponents of these cuts often argue both that cutting corporate taxes will benefit workers, not capital owners, and that cutting corporate taxes is only fair because capital incomes are being taxed twice. These are not compatible arguments.

Claim: If corporations were allowed to immediately expense all costs, rather than having to depreciate certain big-ticket purchases over time, they would invest more in the economy.

Response: Evidence from “bonus depreciation” policies—which allow businesses to depreciate a larger amount in the first year—shows that such a policy is not likely to boost aggregate demand by very much, making it a poor stimulus measure.

American corporations are already seeing historically high after-tax profits. If investment is lagging, it reflects a lack of demand in the market, not profitability that has been sabotaged by tax law.

Immediate expensing is a bit of a technical point, but it relates to how corporations are taxed based on the costs of durable capital investments. Business costs for assets that will depreciate over time are not immediately deducted; instead, they are written off on a depreciation schedule spanning a number of years depending on the type of the asset. Immediate expensing would allow such assets to be written off the year they are bought, even though the assets continue to provide useful services (and usually are paid for) over a long period of time.

Immediate expensing is aimed at reducing the marginal effective tax rate on certain types of new investments. We note in previous sections the problems with such a focus on savings and investment as solutions to the current challenges facing the economy.

In addition, we can get more specific about what to expect from immediate expensing by looking at the evidence from previous bonus depreciation policies. Bonus depreciation resembles a move toward immediate expensing. With bonus depreciation, businesses are allowed a bonus amount of deductible depreciation in the first year above what is normally available. Bonus depreciation has been in and out of effect since 2001, and typically the bonus has been around 50 percent of the cost of the asset. The available evidence indicates that bonus depreciation, like a corporate income tax cut, does not boost aggregate demand by much, making it a poor stimulus measure. As shown in Table 1, Mark Zandi of Moody’s Analytics estimates a fiscal multiplier of 0.25 for accelerated depreciation (Zandi 2010). This is far from shocking—corporate rate cuts through any means are simply not a very valuable stimulus measure, as the benefits accrue to high-income households that will save a large portion of any extra dollar coming their way.

The effects on productivity from an effective rate cut are likely to be quite modest even in the long run and even if the economy reaches and stays at full employment. And, in this full-employment long run, these rate cuts will provide no boost at all to productivity unless they are somehow paid for.

Conclusion: Corporate taxes should not be cut

Corporate income taxes have been taking up less and less of the overall tax burden over the past generation, even as owners of corporations have done extraordinarily well in the era of ever-rising inequality. As Figure F shows, while corporate profits as a share of GDP rose from 5.5 percent to 8.5 percent between 1952 and 2015, corporate tax revenues as a share of GDP plummeted—from 5.9 percent to 1.9 percent—during the same period.

Figure F

Despite this, many continue to call for the corporate tax burden to be further reduced by cutting the tax rates these businesses face. These calls are often dressed up with claims that rate cuts will somehow boost the economy and help low- and middle-income American families who have seen such slow growth in their living standards over the past generation. These claims are clearly wrong. The idea that corporate rate cuts are a good strategy for boosting the incomes of low and middle-income families is misguided if not outright deceptive.

Rate cuts would not just fail to boost incomes for the vast majority; they would also deprive the federal government of the revenue it will need in coming years both to honor the commitments it has made to provide social insurance and a safety net and to maintain (let alone expand) needed public investments. If rate cuts were proposed as part of a policy package that also included strategies to stem the erosion of the corporate tax base and result in at least revenue neutrality, a fruitful discussion might be possible. But in tax policy proposals, too often the rate cuts are specified and immediate and concerns about how to broaden the tax base are largely ignored.

Corporate tax reform needs instead to restore the severely eroded corporate income tax base by closing huge loopholes. The age of allowing “do-it-yourself” tax cuts for corporations that hire clever-enough tax attorneys should end.

About the authors

Josh Bivens joined the Economic Policy Institute in 2002 and is currently the director of research. His primary areas of research include macroeconomics, social insurance, and globalization. He has authored or co-authored three books (including The State of Working America, 12th Edition) while working at EPI, edited another, and has written numerous research papers, including for academic journals. He often appears in media outlets to offer economic commentary and has testified several times before the U.S. Congress. He earned his Ph.D. from The New School for Social Research.

Hunter Blair joined EPI in 2016 as a budget analyst, in which capacity he researches tax, budget, and infrastructure policy. He attended New York University, where he majored in math and economics. Blair received his master’s in economics from Cornell University.

Technical appendix

Gravelle and Hungerford (2012) provide theoretical and empirical criticisms of analyses claiming to find that the revenue-maximizing top corporate tax rate is close to 30 percent. This appendix provides some help in interpreting their theoretical criticisms.

A low revenue-maximizing top corporate tax rate is possible theoretically in small open economy models. These models assume that the prices of goods and interest rates (and rates of return on capital) are set by global, not domestic, markets. Such a small open economy model is needed to generate a low revenue-maximizing corporate tax rate because it is widely conceded that domestic savings responses to increased corporate rate cuts are not large enough to generate a “Laffer curve” effect at low rates. But open economy models offer an added channel through which revenue-maximizing corporate tax rates could be reduced. In an open economy model, it is at least theoretically possible for capital to flow significantly in and out of a country as differences in tax rates between countries increase or decrease.

If it were true that international capital flows are extraordinarily sensitive to corporate tax differences, then higher corporate income taxes in the U.S. could theoretically cause enough capital to flee the U.S. for lower-tax countries that domestic investment would be significantly reduced and productivity growth would slow. Brill and Hassett (2007) in particular point to elasticity estimates of foreign capital flows to after-tax returns in the range of 1.5 to 3.3 as an explanation for their low revenue-maximizing corporate tax rates. However, Gravelle and Hungerford (2012) show that even the small open economy assumptions are not enough to be consistent with empirical estimates of revenue-maximizing corporate tax rates as low as 30 percent. Instead, they point out that so long as the labor share of income is high (i.e., around 75 percent) and so long as the elasticity of substitution between labor and capital is not high (i.e., not greater than 1), then it is very hard to generate a revenue-maximizing top corporate tax rate of less than 75 percent.

The intuition can be illustrated with some algebra. Assume that there is just one good produced and consumed in the economy. In expression (1) below we show that the output of this good can be measured as its price (p) multiplied by the quantity produced and consumed (X). The income generated by this production is split between labor (which earns the wage rate, w, multiplied by the quantity of labor, L) and capital (which earns the rate of return, r, multiplied by the capital services used in production, K).

Essentially, the price of any good is the cost of the labor and capital used to produce it. Expression (2) shows that changes in the price of a good must be fully explained by changes in the cost of labor and/or capital used to produce it. Specifically, the percentage change (represented by a “hat” over a variable) in the price of the good (p) is the weighted average of the percentage change in the wage rate (w) and the percentage change in the rate of return on capital (r), with the weights being the share of total income claimed by labor (wL/X, or φ) and capital (1 – φ), respectively.

Now, introduce a tax on capital (the corporate income tax, t). Expression (3) includes this tax rate in our expression for price changes. This expression highlights that there are three potential ways for the incidence of this tax to be distributed—it can push up prices and be paid by consumers, it can reduce pretax rates of return on capital and be borne by capital owners, or it can lead to lower wage rates.

The small open economy model rules out the first two channels of incidence by assumption—both prices and rates of return are set entirely at the global level and hence are fixed in our domestic economy. This means that the incidence is borne by labor, and it also lets us express wage growth as a function of the corporate tax rate, as in expression (4) below:

The economic channel through which corporate tax rates lower wages in this small open economy model is reduced capital investment. As each worker has less capital to work with, the worker’s productivity, and hence wage, is reduced. Expression (5) below translates how much a given reduction in investment (k) reduces wages, with k̂ being the percentage change in the capital stock (or, investment), l̂ being the percentage growth of the labor force, σ being the elasticity of substitution between labor and capital, and the other variables being the same as above.

The elasticity of substitution measures how much the capital/labor ratio will change given a change in the ratio of wages to capital rates of return. The small open economy assumption holds r and p fixed. Further, growth of an economy’s labor force (l) is also generally assumed to be fixed (at least with respect to variables like changes in the corporate tax rate). Combining expression (5) with expression (4) gives us the change in capital investment as a function of the corporate tax rate:

Setting this change to zero to maximize tax collections yields the result that the revenue-maximizing tax rate is just the labor share of income divided by the elasticity of substitution between labor and capital. The labor share of corporate sector income is easy to observe in economic data—it hovers between 75 and 80 percent, depending on the phase of the business cycle. The elasticity of substitution between labor and capital is a well-researched topic, and the consensus of estimates is that it should be expected to be less than 1 generally. If we liberally estimate that this elasticity is 1, this implies a revenue-maximizing rate of 75 percent. If the true value is less than 1 (which is likely, given the preponderance of econometric evidence) then the revenue-maximizing rate actually increases.

In short, the Gravelle and Hungerford (2012) results show that even with assumptions that create an infinite elasticity of foreign capital flows to after-tax returns, the open economy model is still quite inconsistent with a 30 percent revenue-maximizing corporate tax rate given relatively clear evidence on the labor share of income and the elasticity of substitution between labor and capital. And, of course, it should be apparent how wildly unrealistic it is to assume that the U.S. economy is small and open. The U.S. is not Bermuda and domestic influences certainly affect prices and interest rates, and goods produced in the U.S. and Bermuda are not perfect substitutes for each other.

Endnotes

1. The destination-based cash flow tax (or DBCFT) is a wide-ranging reform of corporate taxation that taxes sales (including imports) instead of profits, and that exempts exports. Auerbach (2010) provides a helpful overview of DBCFT.

2. Lump-sum taxes are hypothetical taxes that collect identical dollar amounts from all taxpayers, for example, assessing a tax of $500 on every American household. Lump-sum taxes generally do not exist in the real world, but they are useful hypothetical constructions because they are the one form of tax that would spur no change in economic behavior at all, since the size of the tax wouldn’t change in response to choices the household makes about work or spending.

3. Eventually, all profits earned by corporations are distributed to the households who own the corporation’s stock. These profits are distributed to households in the form of dividends, capital gains, or exercised stock options. The “incidence” of a tax is the assignment of its ultimate economic cost. So, for example, property taxes are paid by the owners of property, but if a landlord rents an apartment to a tenant, it is almost surely the case that the renter ends up paying (or bearing the incidence of) at least some of the property tax through higher rent payments.

4. Of course, many American households receive significant income from pensions or government transfers as well (i.e., Social Security). Since corporate tax rate cuts have little direct effect on these income flows, we largely ignore them. Since cutting corporate taxes would put pressure on policymakers to either raise other taxes or reduce spending (including transfers), it seems clear that the political effect of corporate tax cuts would be negative even for the future prospects of transfer income recipients.

5. In the mid-1990s, Paul Krugman wrote a series of articles attacking another “myth of competitiveness” in the context of debates over international trade. His argument was that proponents of any particular trade policy had to answer how their preferred policy would boost productivity (or, the amount of income generated in an average hour of work), period. The Krugman argument was valuable in cutting through confusion in seemingly abstruse economic policy debates. But it was incomplete. Boiling down the effect of economic policy changes to what they do for productivity alone is essentially assuming that (a) the economy is always pinned at full employment and that (b) rising inequality will not put a wedge between economy-wide productivity growth and what actually accrues to the incomes of the vast majority. Recent years have shown strongly that the influence of policy changes on productivity growth must share center stage with the influence of these changes on employment generation and income distribution.

6. In a full-employment economy, while corporate rate cuts will boost savings and investment in plant and equipment, there will be a corresponding decrease in consumption spending, so the previous section’s argument—that rate cuts in a full-employment economy will not boost demand—still holds.

7. This observation that interest rates are low and that the economy likely has a glut, not a deficit, of savings, is the mirror image of the argument in the previous section that employment generation has been constrained by insufficient aggregate demand for many years. In fact, Eggertsson and Krugman (2012) argue that tax cuts that incentivize savings can actually reduce economic activity and investment in an economy where short-term interest rates are pinned close to zero. This is because as households try to save, they (by definition) are cutting back on consumption spending. This cutback in consumption reduces aggregate demand. In a healthy economy, the cutback in consumption spending is neutralized by the rise in capital investment that seamlessly channels savings into demand for new capital goods. But when the economy is not healthy, and savings is not being seamlessly translated into new investment, the consumption cutback just reduces aggregate demand, period.

8. The large bulk of federal spending is transfer payments—Social Security, Medicare, Medicaid, SNAP (the Supplemental Nutrition Assistance Program, formerly known as the Food Stamp Program), unemployment insurance, Affordable Care Act subsidies, and so on. Such transfers are tightly targeted at the bottom half of the income distribution. It is obviously much more complicated to determine how to assign the incidence of government spending on agencies like the Department of Labor or the Environmental Protection Agency. CBO generally assigns the incidence of this type of government consumption and investment spending either proportionally to the existing income distribution or equally across the population.

9. For the purpose of providing a clearer explanation, we ignore here the slight difference between what current laws would refer to as a U.S. or foreign corporation for tax purposes and what CBO refers to as U.S.- or foreign-owned corporation.

10. To understand the intuition behind the mirror-image relationship between the current account and capital inflows, take the example of the United States, which generally sees imports exceed exports in a given year. This trade deficit implies that residents of other countries have sent us more goods than we have sent them in return. But since residents of any country do not generally give goods away for free, there must be some corresponding flow of payments to make up the difference. Generally, the excess of imports over exports is financed by U.S. asset holders giving up some of their claims on future income to foreigners, by selling foreigners corporate equities or debt or (mostly) Treasury bonds. This means our negative trade deficit is matched by foreign inflows of money buying U.S. assets—or a capital account surplus.

11. See the technical appendix at the end of this report for more information on Gravelle and Hungerford’s assumptions and the intuition of their results.

12. See Gravelle and Hungerford (2012) for a review of these studies, as well as a critique of many of them.

References

Auerbach, Alan J. 2010. A Modern Corporate Tax. The Center for American Progress and The Hamilton Project.

Bivens, Josh, and Lawrence Mishel. 2015. Understanding the Historic Divergence between Productivity and a Typical Worker’s Pay: Why It Matters and Why It’s Real. Economic Policy Institute.

Blair, Hunter. 2016. “Treasury Acts to Curb Inversions.” Working Economics Blog (Economic Policy Institute), April 5.

Brill, Alex, and Kevin Hassett. 2007. Revenue-Maximizing Corporate Income Taxes: The Laffer Curve in OECD Countries. AEI Working Paper no. 137. American Enterprise Institute.

Bureau of Economic Analysis (BEA). 2016. “Corporate Profits After Tax (without IVA and CCAdj)/Gross Domestic Product [GDP].” Retrieved from FRED, Federal Reserve Bank of St. Louis.

Bureau of Economic Analysis (BEA). Various years. Fixed Assets [data tables]. U.S. Department of Commerce.

Bureau of Economic Analysis (BEA). Various years. National Income and Product Accounts (NIPA) Tables [data tables]. U.S. Department of Commerce.

Bureau of Labor Statistics (BLS). Various years. All Urban Consumers: Chained Consumer Price Index (CPI) [database]. U.S. Department of Labor.

Bureau of Labor Statistics (BLS). Various years. Labor Productivity and Costs by Industry Chart Dashboard [interactive tables]. U.S. Department of Labor.

Citizens for Tax Justice (CTJ). 2016. Fortune 500 Companies Hold a Record $2.4 Trillion Offshore: They May Be Avoiding up to $695 Billion in U.S. Taxes.

Clausing, Kimberly A. 2007. “Corporate Tax Revenues in OECD Countries.” International Tax and Public Finance vol. 14, no. 2, 115–133.

Clausing, Kimberly A. 2016. The Effect of Profit Shifting on the Corporate Tax Base in the United States and Beyond. Reed College Department of Economics.

Congressional Budget Office (CBO). 2013. The Distribution of Federal Spending and Taxes in 2006.

Congressional Budget Office (CBO). 2016. The Distribution of Household Income and Federal Taxes, 2013.

Congressional Budget Office (CBO). 2017. International Comparisons of Corporate Income Tax Rates.

Devereux, Michael P. 2006. Developments in the Taxation of Corporate Profit in the OECD Since 1965: Rates, Bases and Revenues. Oxford University Centre for Business Taxation.

Diamond, Peter, and Emmanuel Saez. 2011. “The Case for a Progressive Tax: From Basic Research to Policy Recommendations.” Journal of Economic Perspectives vol. 25, no. 4, 165–190.

Eggertsson, Gauti, and Paul Krugman. 2012. “Debt-Deleveraging and the Liquidity Trap: A Fisher-Minsky-Koo Approach.” Quarterly Journal of Economics vol. 127, no. 3, 1469–1513.

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Fullerton, Don. 2008. “Laffer Curve.” In The New Palgrave Dictionary of Economics, Second Edition, Steven N. Durlauf and Lawrence E. Blume, eds. Palgrave Macmillan. Accessed April 5, 2017, at The New Palgrave Dictionary of Economics Online.

Government Accountability Office (GAO). 2016. Corporate Income Tax: Most Large Profitable U.S. Corporations Paid Tax but Effective Tax Rates Differed Significantly from the Statutory Rate. GAO Publication 16-363.

Gravelle, Jane G. 2014. International Corporate Tax Rate Comparisons and Policy Implications. Congressional Research Service.

Gravelle, Jane, and Thomas L. Hungerford. 2008. “Corporate Tax Reform: Should We Really Believe the Research?” Tax Notes vol. 121, no. 4.

Gravelle, Jane G., and Thomas L. Hungerford. 2012. Corporate Tax Reform: Issues for Congress. Congressional Research Service.

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McIntyre, Robert S., Matthew Gardner, and Richard Phillips. 2014a. The Sorry State of Corporate Taxes: What Fortune 500 Firms Pay (or Don’t Pay) in the USA and What They Pay Abroad—2008 to 2012. Citizens for Tax Justice.

McIntyre, Robert S., Matthew Gardner, and Richard Phillips. 2014b. 90 Reasons We Need State Corporate Tax Reform: State Corporate Tax Avoidance in the Fortune 500, 2008 to 2012. Citizens for Tax Justice.

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• Stand firm against any plan that includes net tax cuts for high-income households and corporations.

This means rejecting plans that include net tax cuts for high-income households and corporations but also offer crumbs to progressives, either in the form of “middle-class tax cuts” or infrastructure spending.

• Resist the urge to base opposition to tax cuts for high-income households on concerns about increasing the federal budget deficit.

Stand firm against any plan that includes net tax cuts for high-income households and corporations

Since 1979, the share of total national income claimed by the richest 1 percent of households has increased substantially. Yet the effective tax rate (including the incidence of corporate income taxes) on this group was lower in 2013 (the latest year for which data are available) than in 1979. The U.S. economy has worked extraordinarily well for those in the top 1 percent of the income distribution in recent decades (see Figure A). Tax cuts that give these families a vastly disproportionate share of the benefits should not be a policy priority.

Figure A

In the longer run, with a different Congress, the progressive priority should be to increase effective tax rates on the top 1 percent. These top effective rates were boosted in the later years of the Obama administration, but they remain below their 1979 levels, even as incomes of top 1 percent households grew several times faster than incomes of middle-class households. While the long-run fiscal situation of the United States is fundamentally strong, we will need more revenue in the future to honor existing commitments to social insurance, income support, and public investment, let alone to expand these commitments. It just makes sense that this revenue should come from the group that has done extraordinarily well over recent decades.

Further, a growing research base indicates that the decline in top effective rates has contributed substantially to rising inequality in recent decades.1 Essentially, these rate cuts have powerfully boosted incentives for well-placed economic agents (think CEOs and finance sector professionals) to rig the rules of the economy to direct a disproportionate share of the benefits of economic growth to themselves. In simple terms, they have more reason to use their political and economic power to steer the fruits of economic growth their way because lower taxes means they get to keep a greater share of what they claim. While progressives should aim to stop the rigging of these rules in each particular case (through financial regulation or improved corporate governance, for example), tax reform that raised the effective rate on top income households could significantly blunt the incentive for this rule-rigging across-the-board.2

In this hypothetical policymaking world—one with a more progressive and evidence-based Congress—one could also imagine corporate tax reform that lowers the statutory rate yet closes loopholes to keep net revenue collected from the corporate income tax unchanged (or even increase it). We could also imagine proposals that radically scale back the corporate income tax yet boost progressive taxes on the individual side (or through financial transactions taxes) to keep the overall system at least as progressive as it is today. These theoretical possibilities are why we formulate this principle as opposing “net tax cuts for high-income households and corporations.” In reality, though, in the current debate this will almost surely end up meaning that any cuts in either individual or corporate rates should be opposed, since today’s Republican majority is not interested in reform that does anything but increase the post-tax incomes of the richest households.

To be sure, today’s corporate income tax system is riddled with damaging loopholes that intelligent tax reform should close. The most important one to close is the ability of U.S. firms to defer taxation on profits earned abroad (or at least profits engineered to appear to have been earned abroad). Deferral is why it is rational for firms to shift their profits abroad, and it is why more than $2.5 trillion in profits are now sitting offshore untaxed.3 This overseas hoard of profits will put enormous pressure on policymakers to cut a deal to have this money brought back into the country at a very low tax rate. The economic case that repatriating this money at a preferential tax rate will yield large-enough benefits to justify the revenue loss is extraordinarily weak.4 Today’s U.S. economy remains glutted with savings, as demonstrated by interest rates that remain historically low and corporate balance sheets that are so awash in cash that they could essentially finance planned capital investment with internal funds.5 There is no benefit to either near-term or long-term U.S. growth from giving a select group of some of the world’s richest corporations an enormous tax break in exchange for their repatriation of overseas profits, a repatriation that will only increase the savings glut without boosting job growth. But there is a benefit from preserving the corporate income tax, as it is among the most progressive parts of the U.S. tax system; mainly it falls heaviest on capital-based income, which is concentrated at the top of the income distribution (Figure B).

Figure B

Reject plans that offer crumbs to progressives, either in the form of “middle-class tax cuts” or infrastructure spending

Some Democrats in Congress might seek to avoid being labeled the “party of no” by trying to strike a deal on taxes. It is almost inconceivable that any deal driven by the Republican majority will not include large tax cuts for the richest households and/or corporations. Given this, hopes for an acceptable deal should be very low. Crucially, appending some small-scale progressive priorities to a tax bill that provides huge benefits to the richest households should be unacceptable.

One common locus of potential dealmaking concerns “middle-class tax cuts.” Progressives should be clear about something: the federal income tax rates faced by middle-class Americans have nothing to do with their struggles to maintain economic security amid stagnating living standards in recent decades. In fact, the effective federal income tax rate faced by the bottom 80 percent of American households has fallen enormously between 1979 and 2013 (see Figure C below). And yet pretax income of this group has fallen ever-further far behind economy-wide averages, held down by rising inequality (see the red line in Figure C). At some point, policymakers genuinely concerned about boosting incomes for middle-class families will have to realize that middle-class tax rates are a pathetically weak lever to pull, and they should move on to other policies that will actually help these families.6

Figure C

Demands that progressives present “their plan” for boosting middle-class incomes should be easy to answer. First, we want to raise more revenue from the top, both to honor—and even expand—current commitments to social insurance and income support and to fund public investments in the future. Second, we want to use every lever in the policy toolkit—not just tax policy—to shift economic leverage and bargaining power toward low- and moderate-wage households.7 What we refuse to do is engage in voodoo economics by claiming that cutting effective middle-class income tax rates from 4 percent to 3 percent will somehow be game changing for the middle class.

Besides calls for “middle-class tax cuts,” the other siren song for Democrats who want to make deals during the upcoming tax debate will be promises to bundle infrastructure investments in a package of tax cuts. Expanded public investment of all types—including infrastructure—have been a progressive priority for years.8 And yet it is enormously unlikely that any forthcoming tax deal will include an attractive-enough infrastructure plan to be worth swallowing enormous, regressive tax cuts.

For one, any policy package that includes both large tax cuts and increased infrastructure spending will almost by definition need to come with steep cuts in other parts of the federal budget. We know such cuts are a Republican priority, as exemplified both by the Better Way plans forwarded by Speaker Ryan as well as by President Trump’s recent “skinny budget.” Any such federal budget cuts would completely neutralize any near-term job-creation benefit from infrastructure spending, eliminating much of the rationale for infrastructure investment.9

Further, the infrastructure proposals that have been issued by Republicans in recent years have been exercises in marketing rather than serious economic proposals. Their common theme is putting minimal amounts of federal spending into these plans and then making large, unfounded claims that this small amount of federal spending will “leverage” massive amounts of private capital to invest in infrastructure.10 The plan issued in 2016 by Peter Navarro and Wilbur Ross for the Trump campaign is essentially a recipe for giving tax breaks to firms that were going to be involved in infrastructure projects anyhow, without inducing any additional investment; roughly $400 billion in infrastructure investment happens each year even without any particular policy intervention to increase it.11

Resist the urge to base opposition to tax cuts for high-income households on concerns about increasing the federal budget deficit

Arguing against regressive tax cuts by amplifying fears about too-large federal budget deficits is bad economics and bad political strategy. It is bad economics because the U.S. economy’s fiscal position is fundamentally solid.12 There is no evidence that fiscal profligacy is either harming us now or is poised to harm us anytime soon. Long-term interest rates and inflation remain low. The single largest driver of long-run spending trends is the growth in per capita health care costs, and these costs have slowed significantly over the past decade. The estimated 30-year fiscal gap—how much (starting today) taxes would need to be raised or spending would need to be cut to hold the debt-to-GDP ratio constant—has also narrowed. In its 2016 Long-Term Budget Outlook, the Congressional Budget Office (CBO) has the 30-year fiscal gap at under 2 percent, down significantly from estimates made a decade ago.

Further, the economy remains damaged by the Great Recession, with several indicators demonstrating a remaining gap between aggregate demand and potential supply (see Figure D). For example, the share of 25- to 54-year-olds with a job is still too low: the prime-age employment-to-population ratio (EPOP) remains substantially below its 2007 peak, and far below the peak it reached in 2000. Because this is a fixed-age group, this is not a story of rising college enrollments or retirements caused by demographic change. Key evidence that this historically depressed prime-age EPOP is due to the slack in demand comes from the still-sluggish growth in nominal wages, which have yet to break 3 percent annualized growth over the entire course of the recovery from the Great Recession. This growth rate is far below the level—3.5 percent and above—needed to restore the economy’s overall price growth and labor share of income to historically normal levels.13 Finally, core prices remain below the Fed’s target for a healthy economy, and have been below this target for years now.

Figure D

The relevance of this demand-slack for fiscal debates is that anything that convinces policymakers to prioritize rapid reductions in the federal budget deficit will drag on growth and prolong the years-long failure to engineer a full recovery. This is not an academic concern. The enormously premature “pivot to austerity” that characterized fiscal policy in 2011 became by far the single biggest reason why the recovery from the Great Recession has been the slowest on record.14 If concerns about budget deficits somehow convince Congress to pair regressive tax cuts with spending cuts, this would be a near-term macroeconomic disaster, as the fiscal drag from spending cuts would easily swamp any stimulus from high-income tax cuts.

Crucially, fomenting the misperception that the federal budget deficit is always too large and growing is pure poison for long-run progressive goals. As public opinion expert Ruy Teixeira has put it, “Arguably, there is no greater obstacle to progressive change than the idea of austerity.”15 Pollster Celinda Lake has also noted evidence that stirring up deficit concerns in the short run to fight destructive tax cuts boomerangs, harming progressive efforts to boost social insurance, safety net, and public investment spending.16 The broader public often quickly translates concerns over budget deficits into concerns over spending, and convincing the broader public that any growth in spending programs is doing damage to the U.S. economy is the linchpin of conservative efforts to pare back the already pretty threadbare American system of social insurance, income support, and public investment.

While invoking deficit fears is bad economics and bad strategy, noting implicit trade-offs can be illuminating. That is, regardless of the pluses or minuses of what regressive tax cuts do to budget deficits, they unambiguously represent resources that the federal government will no longer have. It seems perfectly reasonable to ask why, for example, Speaker Ryan believes that the federal government has $3 trillion in revenue to give away to the top 1 percent (literally 99.6 percent of his plan’s benefits accrue to the top 1 percent by 2025), but not $3 trillion to boost health coverage, or fix the nation’s eroded unemployment insurance system, or expand Social Security, or undertake substantial public investments.17 But it is not economically rational or politically astute to claim that tax cuts should be dedicated to “paying down debt,” or that today’s fiscal situation is already dire and hence tax cuts just make it worse. Today’s fiscal situation is not dire; the only thing standing between the United States and the ability to not just honor, but expand, the federal programs that provide crucial help to low- and moderate-income households is the tax-cuts-over-everything-else ideology of the Republican Party.

About the author

Josh Bivens joined the Economic Policy Institute in 2002 and is currently the director of research. His primary areas of research include macroeconomics, social insurance, and globalization. He has authored or co-authored three books (including The State of Working America, 12th Edition) while working at EPI, edited another, and has written numerous research papers, including for academic journals. He often appears in media outlets to offer economic commentary and has testified several times before the U.S. Congress. He earned his Ph.D. from The New School for Social Research.

Endnotes

1. The overview and empirical evidence linking falling top tax rates and rising inequality can be found in Thomas Piketty, Emmanuel Saez, and Stefanie Stantcheva, “Optimal Taxation of Top Labor Incomes: A Tale of Three Elasticities,” American Economic Journal: Economic Policy, vol. 6, no. 1, February 2014.

2. For more on this argument see Josh Bivens and Lawrence Mishel, “The Pay of Corporate Executives and Financial Professionals as Evidence of Rents in Top 1 Percent Incomes,” Journal of Economic Perspectives, vol. 27, no. 3, summer 2013.

3. For estimates of the scale of corporate profits parked offshore deferring taxation see Richard Phillips et al., Offshore Shell Games 2016: The Use of Offshore Tax Havens by Fortune 500 Companies, U.S. PIRG, Citizens for Tax Justice, Institute of Taxation and Economic Policy, October.

4. The benefits of the last repatriation holidays in 2014 are surveyed in Chuck Marr and Chye-Ching Huang, Repatriation Tax Holiday Would Lose Revenue and Is a Proven Policy Failure, Center on Budget and Policy Priorities, 2014.

5. See a forthcoming EPI report by Josh Bivens and Hunter Blair for evidence that corporate internal funds can finance planned investment to a historically large degree (working title: “Competitive” Gibberish: The Flawed Evidence and Logic behind Claims that Corporate Tax Rates Are Too High, Economic Policy institute, 2017).

6. For more on why middle-class income tax cuts are such a limited strategy, and a review of policies that would actually help middle-class families, see Lawrence Mishel, “Even Better than a Tax Cut,” The New York Times [op-ed], February 23, 2015.

7. EPI’s “Agenda to Raise America’s Pay” presents a comprehensive set of policies for boosting American workers’ pay.

8. EPI, for example, was recommending a substantial increase in infrastructure spending as an alternative to the Economic Stimulus Act of 2008—fully a year before the American Recovery and Reinvestment Act (ARRA). See John Irons, Lawrence Mishel, and Ross Eisenbrey, Strategy for Economic Rebound: Smart Stimulus to Counteract the Economic Slowdown, Economic Policy Institute, January 11, 2008.

9. For the finding that cuts to federal spending (particularly transfers) will near-totally neutralize the short-term job-creation benefits of infrastructure spending, see Josh Bivens, The Short- and Long-Term Impacts of Infrastructure Investments on U.S. Employment and Economic Activity, Economic Policy Institute, 2014.

10. For a review of common weaknesses regarding claims of the benefits of “engaging the private sector,” see Hunter Blair, No Free Bridge: Why Public–Private Partnerships or Other ‘Innovative’ Financing of Infrastructure Will Not Save Taxpayers Money, Economic Policy Institute, 2017.

11. For an analysis of how to evaluate public investment plans see Josh Bivens and Hunter Blair, A Public Investment Agenda that Delivers the Goods for American Workers Needs to be Long-lived, Broad, and Subject to Democratic Oversight, Economic Policy Institute, 2016.

12. See Harry Stein, “America Can Still Do Big Things: Dispelling the Fiscal Hysteria that Thwarts
Good Public Policy,” Harvard Law & Policy Review, vol. 11, 2017, for an excellent overview of the fundamentally sound fiscal position of the United States.

14. See Josh Bivens, Why Is Recovery Taking so Long—and Who’s to Blame?, Economic Policy Institute, 2016, on the role played by austerity in leading to slow growth following the Great Recession.

15. See Ruy Teixeira, “Austerity: The Biggest Roadblock To Progressive Change,” ThinkProgress (Center for American Progress blog), April 26, 2013.

16. Pollster Celinda Lake made this point in a talk during remarks delivered at The New Populism Conference in Washington, D.C., May 22, 2014.

17. See James R. Nunns et al., An Analysis of the House GOP Tax Plan, Tax Policy Center, 2016, for an analysis of the House Republican tax plan from last year.