The arguments supporting corporate tax cuts are wrong, and territorial taxation will make things worse
Congressional Republicans are set to release the final version of their tax bill this evening. Pending more details, the final bill coming out of the conference committee looks increasingly like the Senate version of the bill, which makes Republican tax priorities clear. Most of the individual provisions in the bill are temporary, and the exceptions to this actually raise taxes on households—by tying tax brackets to a new, lower inflation rate and reducing the number of people receiving help buying health insurance through the Affordable Care Act. The end result for the Senate bill was that on average, households making under $75,000 would see a tax increase by 2027 according to the Joint Committee on Taxation.
On the other hand, the changes for corporations, such as lowering the corporate tax rate and shifting to a “territorial” tax system, are permanent. Since changes benefiting corporations are the only policies deemed worth keeping by Republicans (besides those that raise taxes on most families), it bears repeating that these cuts will not trickle down to typical workers, and arguments to the contrary are not credible.
The typical first argument peddled is that U.S. corporations are taxed at disproportionately high rates and this hurts U.S. workers through some vague notion of “competitiveness.” As we’ve detailed, “competitiveness” is a meaningless term and the evidence doesn’t support the idea that cutting corporate tax rates will help typical American workers. There is no international evidence that corporate tax cuts boost investment (which could potentially lead to higher wages), nor is there any evidence on the state-level that corporate tax cuts boost wages.
But further, it just isn’t true that U.S. corporations are paying disproportionately high taxes compared to our international peers. Sure, the statutory federal rate of 35 percent is high—but that’s not the rate corporations are actually paying. Instead, through various loopholes—mostly the deferral loophole—they pay somewhere between 13 and 21 percent, which isn’t out of line with our international peers.
(Sometimes proponents of tax cuts for large multinationals will point to a Congressional Budget Office (CBO) study as “proof” that our effective rate is also high. But that’s not what the CBO study actually shows. Instead, the CBO study bolsters conventional wisdom—large multinational corporations are using accounting gimmicks to avoid paying their U.S. taxes.)
Putting an exact number on the effective rate, and comparing that number to international peers, is difficult due to data limitations. But given that the statutory rate is indeed high, a quick comparison of corporate revenues to peer countries tells us that something must be amiss in the U.S. corporate tax code. The United States raises 2.2 percent of GDP in corporate tax revenues, while other OECD countries with lower statutory rates raise an average of 2.9 percent of GDP in corporate tax revenues. Since U.S. capital shares are in line with peer countries, it’s unlikely that we raise less in corporate taxes as a share of the economy because of a low capital share of income. All that is left is that the United States raises a paltry amount in corporate tax revenues as a share of the economy because corporations pay nowhere near the statutory rate.
Finally, besides cutting the statutory corporate rate, the final Republican tax plan would move the United States to a “territorial” system of corporate income taxes. Territorial taxation is economic jargon that means U.S. corporations would no longer be taxed on their offshore income. This provides a clear incentive for these corporations to move either real plants and jobs offshore, or to at least move profits offshore through creative accounting.
U.S. multinationals are already avoiding $752 billion in taxes on the $2.6 trillion in profits they’ve booked offshore. They do this through the deferral loophole, which allows them to defer paying taxes on the income they’ve booked offshore until it is repatriated to U.S.-based owners. These corporations are clearly keeping the money offshore in the hopes that Congress will allow them to keep it forever tax-free (or at least taxed more lightly than today’s rates). It’s not a speculative hope—Congress did exactly this in 2004 by giving a tax “holiday” on profits repatriated in that year. And the current Senate tax bill provides an enormous $562 billion windfall for these tax dodging U.S. multinationals. A move to a territorial system would simply make the deferral loophole permanent, meaning that U.S. corporations wouldn’t ever have to pay meaningful taxes on the income they’ve booked offshore (the proposal does have a small “minimum” tax on foreign-earned profits). The most likely result of the shift toward territorial taxation is exacerbating U.S. multinational tax avoidance. Why pay U.S. taxes when a competent tax lawyer can ensure your income shows up in tax havens?
There are rules that could stop the most obvious ways tax lawyers will seek to use territorial to erode the corporation income tax base, but none are included in the final Republican bill. It is unlikely that rules designed to mitigate erosion of the corporate tax base will be strong enough to outsmart highly-paid corporate lawyers determined to allow their firm to dodge its taxes. But even if the rules were made strong enough, that doesn’t make territorial taxation better. Instead, it just means that territorial taxation would lead to offshoring. U.S. multinational corporations would be incentivized to shift investment into low tax rate jurisdictions.
All told, the tax bill is nothing more than a giveaway to large corporations. Arguments that it will grow the economy or help working people are not supported by the evidence.