In December of 2017, President Trump signed the Tax Cuts and Jobs Act, sold as a “once in a generation reform of the tax code” and a tax cut for middle class families. While I have my complaints about the TCJA, namely the process in which it was written, its impact on the deficit, and its stopping short on tax simplification, the best part of the bill, and the one Republicans seem uncomfortable selling, is the corporate tax cut.
The Republicans’ lack of mettle in defending the corporate tax cut is all the more worrying given the Democrats’ charges that the reason the Republicans lowered the rate, is because of donor pressure. There are numerous arguments for how corporate tax cuts will grow the economy, raise wages, and keep jobs in the United States, all while not hurting revenue, but the arguments are frequently conflated.
The first argument for how corporate tax cuts will increase wages for average workers, is that a large part of the tax incidence of the corporate income tax actually falls on labor. For those unaware, tax incidence is the effective economic burden of a tax, which is distinct from the person who directly pays the government money. For example, liquor taxes are usually leveled on sellers of alcohol, but roughly half of the tax is paid effectively by alcohol consumers in the form of higher prices.
A similar example of tax incidence plays out in the case of the corporate tax. While capital directly pays the corporate income tax, labor indirectly pays part of the tax in the form of lower wages. Economists hotly debate exactly how the burden breaks down between capital and labor, based on various characteristics of the economy being taxed. Estimates of the portion of the burden falling on labor range from 20% to 100%. Nonetheless, economists agree that some of the burden falls on workers, and the litany of companies announcing raises and bonuses after the tax bill’s passage is proof of this economic fact.
The second argument for corporate tax cuts is that lower corporate taxes will lead to more investment and economic growth. This argument is basically supply-side economics: lower taxes will stimulate investment, leading to new technologies that will increase worker productivity and quality of life across the board. A past example would be when tax cuts under Reagan helped stimulate investment in the stock market, that in turn spurred the information technology revolution and massive economic growth.
In the case of the corporate tax, the evidence is strong that lower rates will increase investment. Based on Tax Foundation analysis, a corporate tax cut would stimulate even more economic growth and investment than an equivalent individual tax cut because capital is much more responsive to tax rates than labor.
While progressives seized on an underwhelming number of CEOs at a conference with Gary Cohn stating they would increase investment due to the corporate tax cut, that does not tell the whole story. Economist Tyler Cowen explains in Bloomberg: “While some companies might not immediately invest as a direct result of the corporate tax cut, later on, with more cash on hand thanks to the lower rate, they’ll be able to take advantage of new investment opportunities that they would not have been able to consider had the tax rate been higher.” Nevertheless, plenty of companies have already begun to invest more in direct reaction to the rate cut.
The third argument for the corporate tax cuts, is that lower corporate taxes will make the US more competitive with other countries. Before the TCJA, the US had the highest statutory corporate rate and fourth highest effective corporate rate in the developed world. Following the TCJA, the US should be more in line with international averages. Additionally, reducing the rate to 21% would mirror the global lowering of corporate taxes that has occured over the past 30 years.
There are two lessons to draw from foreign experiences in lowering the corporate tax rate. One is in regards to revenue: many countries lowered their corporate rates and saw revenues increase. For example, from 1988 to 2000, Canada lowered their corporate tax rate from 43% to 26%, yet they saw revenue from the tax increase from 2.9% of GDP to 3.3% of GDP, a clear example of Laffer Curve behavior. The UK saw similar behavior when they reduced their corporate tax rate from 30% to 20% over a six-year time span and saw corporate tax revenue as a share of GDP stay flat.
The second lesson from foreign countries is the value of a low corporate tax rate in attracting foreign investment. In an open global economy, having a low corporate tax rate means luring multinational corporations to both station their money and invest. Ireland was once considered a European economic backwater, but over the past decades, it has been an economic powerhouse due to its far lower tax rate than comparable countries. While the US’s economy is not identical to Ireland’s, the economic merits of a lower tax rate in our global economy are clear. It will both attract foreign investment and broaden the tax base.
The TCJA is not a perfect tax reform package, and I have criticized its failings at length. That being said, the corporate tax cut is the highlight from an economist’s perspective, and the GOP needs to make the coherent, affirmative case for how this policy will both benefit workers and grow the economy.
The views expressed in this article are the opinion of the author and do not necessarily reflect those of Lone Conservative staff.