AT&T makes bold but unsurprising declaration on lower business taxes

AT&T makes bold but unsurprising declaration on lower business taxes
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It should be big news when the CEO of a major American businesses declares that the firm is ready to increase its annual domestic investment by $1 billion. That’s exactly what AT&T chairman and chief executive officer Randall Stephenson pledged this month. The enactment of tax reform is the trigger that would enable AT&T to move forward with this bold commitment.

Stephenson said, “With a rate of 20 percent combined with provisions for full expensing of capital expenditures for the next five years, we’re prepared to increase our investment in the United States. If the House bill is signed into law, we’d commit to increase our domestic investment by $1 billion in the first year in which the new rates are in place. And research tells us that every $1 billion in capital invested in telecom creates about 7,000 good jobs for the middle class.”

No doubt, assorted people, including in policy circles, were surprised by this pledge. They shouldn’t be. Indeed, this was a bold declaration by Stephenson, but it should not be surprising. Quite simply, when you reduce taxes on any activity, you’re going to get more of such activity. That’s Economics 101. Allowing for full expensing of capital investment should spur such investment. A vastly lower tax rate, reduced from 35 percent to 20 percent, would incentivize business investment and growth, and significantly improve the U.S. global position in terms of tax competitiveness.

The good news gets even better when we recognize that these enhanced incentives don’t only apply to a big company like AT&T, but also to small and midsize companies. For example, consider that 86 percent of C corporations have less than 20 employees, and nearly 97 percent have less than 100 workers, according to the Census Bureau. Many of these small C corporations are growing firms or have the potential to be such.

We also know that when U.S. corporations invest, a good portion of that spend is with small business suppliers. A study conducted in 2010 by the Business Roundtable found that large U.S. corporations collectively generated an estimated $1.5 trillion in sales for small businesses on an annual basis. Individual companies reported purchasing goods and services from an average of more than 6,000 small businesses every year.

More investment by AT&T and others in the U.S. means more business for small businesses. For good measure, the 95 percent of U.S. businesses that are not C corporations, such as S corporations and limited liability companies, are mostly small firms that would pay a lower top personal income tax rate, reduced from 39.6 percent to 25 percent in the House plan, on business profits. That substantially lower tax rate would boost incentives for entrepreneurship, investment and business development.

House tax negotiators have resolved some fairness issues for pass-throughs to ensure more small businesses see tax relief in the bill they are soon sending to the floor for a vote. As noted with the investment pledged by AT&T, increased business investment from small firms would be very good news in terms of faster economic, productivity, income and job growth.

A positive shift in incentives for investment is critical. After all, slow economic growth and stagnant wages over the past decade has largely been about sluggish private sector investment. In the end, deep tax rate reductions for businesses will generate faster economic growth due to improved incentives for investing and entrepreneurship. The Republican tax bill aims to achieve this critical goal, which must not be forgotten as the process and negotiations move forward.

Raymond Keating is chief economist for the Small Business & Entrepreneurship Council.