Yes. Tax reform will boost US investment. 

Greg Nash

At a recent event with presidential economic advisor Gary Cohn, the moderator asked CEOs in the audience to raise their hands if their companies plan to invest more if tax reform legislation is enacted. Only a few hands went up.

This episode quickly fueled a narrative that the proposed changes in the corporate tax code will result only in share buybacks and boosted dividends, benefiting only shareholders. A handful of earnings calls have prolonged this narrative.

{mosads}Put aside for the moment the fact that benefitting shareholders – most of whom are ordinary Americans – is not such a bad thing. The overwhelming evidence is that the tax bills now pending in the House and Senate would substantially boost U.S. business spending on plant, equipment, hiring and wages.

Take Randall Stephenson, CEO of AT&T. When the House bill permanently reducing the corporate tax rate from 35 percent to 20 percent was introduced, Stephenson committed to increase AT&T’s investment by an additional $1 billion in 2018. Based on research, every $1 billion in capital invested in the telecom industry creates about 7,000 jobs for American workers.

Such investments are badly needed. U.S. “net capital formation” – which measures business investment in new plant and equipment – is growing at less than half the rate it did in each of the last three decades.

America’s slowdown in net capital formation is due, in significant part, to our outdated tax code. While nearly every other wealthy nation has modernized its tax code over the past three decades, America has not. Indeed, U.S. companies pay the highest combined corporate rate in the developed world. The effects are unsurprising: other countries have become more attractive places to invest. Which is why, when asked what could stimulate economic investment in America, Stephenson responded: “I know of no catalyst as important and basic as . . . tax reform.”

Don’t take only Stephenson’s word for it. Ask Larry Merlo, CEO of CVS Health. Merlo says that if tax reform passes, CVS Health would accelerate the building of additional pharmacies and MinuteClinics, creating thousands of permanent jobs and construction jobs. A corporate rate cut would also enable the company to invest in digital tools and other technologies benefitting consumer health.

Stephenson and Merlo are not outliers. My organization, the Business Roundtable, recently surveyed our roughly 200 CEO members. Eighty-two percent of respondents said that – if tax reform is enacted – they would increase their capital spending. Seventy-six percent would increase hiring. On the flip side, nine in 10 said that delaying tax reform would hurt the U.S. economy.

Numerous economic studies confirm that workers would be the major beneficiaries of the kind of tax reform currently under consideration. According to a recent Harvard Business School paper, “between 45 and 75 percent of the burden of corporate taxes is borne by labor.” A Congressional Budget Office study arrived at a similar number, finding that labor bears “slightly more than 70 percent of the long run burden of the corporate income tax” in an open economy. Even cautious analysis by Congress’s Joint Committee on Taxation estimates that workers bear 25 percent of the burden of the corporate income tax. 

Why does this matter? Because it underscores what Business Roundtable CEOs know from their own experience: America’s current high corporate tax rate depresses capital spending and wages at home and encourages relocation and investment abroad.

In the face of all the evidence pointing toward higher capital and labor spending in the United States from tax reform, some opponents will still say: “Wait! They’re lying – just like in 2004 when all they did with the money from a tax holiday was buy back shares and raise dividends.”

This criticism is unwarranted. First, the conventional wisdom about 2004’s one-time repatriation tax holiday simply isn’t true. A study by Harvard Law School’s Thomas Brennan found that more than 70 cents of each repatriated dollar from the companies bringing the most funds back went towards acquisitions, debt reduction, capital expenditures and R&D.

Second, the pending tax bills are entirely different from the 2004 legislation. Whereas the 2004 measure was a one-time, voluntary tax holiday on money multinationals chose to bring back to the United States, the current tax proposals would require companies to pay taxes on all their accumulated foreign earnings, while we transition to a territorial tax system. This means that over $2.6 trillion of U.S. companies’ earnings, currently trapped overseas, will be taxed – regardless of whether they are repatriated – removing the current disincentive to invest the money at home.

More importantly, the current bills’ repatriation provisions are part of an overall reform that lowers the corporate tax rate, that moves the United States toward a territorial system of taxation, and that permits full expensing of domestic investments. Taken together, these reforms would make the U.S. tax code globally competitive. They would dramatically reverse the many perverse incentives that currently exist for capital and companies to flee our shores. And they would promote higher wages and investment right here in the U.S.

Through the proposed tax reform, members of Congress have a once-in-a-generation opportunity to restore the competitiveness of the U.S. as a place to do business and to provide workers a long-overdue pay raise. They should take it. 

Joshua Bolten is President & CEO of Business Roundtable.


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