The Right Way to Cut Corporate Taxes

The Right Way to Cut Corporate Taxes

Then there’s Mr. Trump’s warmed-over version of trickle-down economics. The White House asserts that businesses will take the money they save on taxes and use it to give workers raises and go on hiring binges. Sounds nice, but there’s little empirical evidence for this fairy tale. In fact, there was no such surge in income after Congress slashed the corporate tax rate in the 1980s; nor was there in Britain as it cut its corporate tax rate in recent years.

A Shrinking Burden

In 50 years, corporate taxes have dropped as a share of gross domestic product.

So what would true reform look like? First, it would not blow a $1.7 trillion hole in the budget over the next decade, which is what the House plan would do, according to the Congressional Budget Office. Second, it would make the system fairer and more efficient. If Republicans worked with Democrats, they could reach a compromise to lower the top corporate tax rate to between 25 percent and 28 percent, eliminated loopholes and reduced the incentive businesses have to take on debt, rather than to use equity to expand. Under current law, interest is deductible for tax purposes while dividends are not.

Real reform would also include a minimum tax on profits earned abroad by American corporations in the year those profits are earned, minus a credit for taxes paid to other countries. Businesses can now defer taxes on such profits indefinitely, as long as they do not bring the money back to the United States. Big companies like Apple, General Electric and Microsoft have kept an astonishing $2.6 trillion in profits offshore, hoping Congress will lower the tax rate or give them a tax holiday to repatriate the money at ultralow rates. The House bill would let companies bring those profits home at 7 percent (for money invested in hard-to-sell assets) or 14 percent (for cash). A plausible compromise would let businesses repatriate all past profits accumulated overseas at a somewhat discounted rate, say 15 percent to 16 percent. All of this money could be used to rebuild America’s dilapidated infrastructure.

While the outlined changes would solve an immediate problem, Congress also needs to consider longer-term obstacles to tax avoidance by multinational companies. One smart idea that deserves more study is a proposal by economists like Kimberly Clausing, a professor at Reed College. She argues that the United States and other countries ought to tax profits that corporations earn from sales inside their borders, similar to the way American states now tax corporate profits. Each country would control its tax rates, deductions and credits. But companies would lose the ability to game the system by booking profits through subsidiaries registered in zero- or low-tax countries like Bermuda and Luxembourg, where they might be making few sales.

Eventually, Congress will need to do more than just patch the tax system. Even without the Republican tax cut plans, the Congressional Budget Office expects the federal deficit to grow to 5.2 percent of gross domestic product in 2027, up from 3.2 percent in 2016, thanks in part to the Bush tax cuts and the Iraq war. Lawmakers will need to consider new sources of revenue, including a value-added tax, a carbon tax and a financial transactions tax. Each would broaden the tax base and achieve important policy goals, like encouraging savings, reducing greenhouse gas emissions and reducing risks in the financial system.

The Republican proposals do none of these things. They do, however, reward the wealthy. Among the worst offenders is the proposed corporate tax cut, which is larger than needed and does nothing to make the system more efficient. The victims here are the economy as a whole and the workers and ordinary folk to whom Mr. Trump promised relief.

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