Corporate tax reduction is exactly what we need to boost American wages

Corporate tax reduction is exactly what we need to boost American wages

The 20 percent corporate rate proposed in the tax reform framework will result in stronger economic growth, higher wages and new or better jobs. It is not, as some on the left claim, a handout to large corporations.

In the increasingly global economy, it is clear that workers are more vulnerable to the high U.S. corporate rate. A high corporate tax rate means that capital will be relocated in a more productive way (i.e. to a country with a lower corporate tax rate). In other words, U.S. capital is mobile, while U.S. workers are not.

Recent studies that take into account this by using an “open economy model” find that workers bear a significant portion of the corporate tax — 50 percent70 percent, or even higher.

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This translates into real money for families across the country. A study released by the Council of Economic Advisors found that a 20 percent corporate rate could result in household wages increasing by between $4,000 and $9,000.

 

Similarly, a study by the Tax Foundation found that reform would boost capital investment by 8.5 percent, and create more than 592,000 jobs, while increasing after-tax incomes of families by an average of $1,800. 

Some question how tax reform can be so beneficial to the economy given the unemployment rate is relatively low at just 4.5 percent. However, this is only part of the picture as labor force participation has steadily declined in recent years. When utilizing the underemployment rate of 8.9 percent, there are 13.5 million people without a job or looking for a full-time job.

Despite the need for tax reform that makes America competitive and grows the economy, Democrats and the left have criticized the business reform in the tax plan as a handout to corporations that would do little to benefit workers.

For instance, a recent study by the liberal Tax Policy Center found that the benefits would be minimal, and would overwhelmingly go to upper income earners. This supposed macroeconomic analysis shows that all of the business reforms, including lowering the corporate rate would have no impact on wages or the economy.

This study also assumes multiple policy decisions that will be decided by committees of jurisdiction through regular order. Because of these details, a similar analysis of the Republican framework released by TPC last month was widely criticized by tax expertsother think tanks, and even the Chairman of the President’s Council of Economic Advisors Kevin Hassett. It appears this latest study is no different and fails to properly account for the benefit of a competitive tax system.

The U.S. corporate tax rate has barely changed since tax reform was passed 30 years ago in 1986. At the time, we lowered our rate to 35 percent – below the developed average of 44 percent. Since then, other countries have cut their rates aggressively in order to gain a competitive advantage.

This high rate makes it difficult, if not impossible for American companies to compete. The average rate in the developed world is around 25 percent, while the European rate is just 18 percent. In fact, 32 of the 35 developed countries have reduced their corporate rates since 2000. Only the U.S. and Chile have higher corporate tax rates than they did in 2000.

The high rate has also resulted in close to 50 American businesses leaving the country through inversions in the past decade, according to data compiled by Democrats on the House Ways and Means Committee. In addition, it has made U.S. innovation vulnerable to foreign acquisitions. 

According to one study, the U.S. business climate is so uncompetitive that American companies have suffered a net loss of almost $510 billion in assets since 2004. The study estimates that a 20 percent corporate rate would have resulted in U.S. companies acquiring $1.2 trillion worth of assets over that same period, meaning that more than $1.7 trillion in assets were lost because of the uncompetitive U.S. rate. Reversing this trend will mean more innovation occurs and stays in America, rather than being acquired by countries with a more competitive tax system.

While the benefits of a lower corporate rate are not immediately visible to taxpayers, it is a key part of tax reform that grows the economy and gives families higher wages and more jobs. President Trump has promised to implement policies that will reverse the trends of stagnant growth and a competitive, 20 percent corporate tax rate should be the cornerstone of keeping this promise.

Alex Hendrie is the director of tax policy at Americans for Tax Reform, a nonprofit group working to support limited government.