Let’s start with a thesis statement: “Lower tax rates mean stronger incentives for business expansion, and that means a brighter economic future for all.” That sounds snappy enough, but is it actually true?
That is, will real Americans share in that brighter economic future? We’re only a month into the passage of the Tax Cuts and Jobs Act, and yet we already have powerful indicators. Let’s take a look.
On Monday, ExxonMobil announced that it would invest an additional $50 billion in the U.S. over the next five years. In the words of ExxonMobil CEO Darren Woods, the decision of his company, as well as of other companies, to invest more in America is “partly as a result of tax reform, which among other things reduced one of the highest corporate tax rates in the developed world.”
So there we have it: Exxon’s Woods says that the tax bill was a catalyst for this expansion. We might ask: Is there any reason not to take the Exxon chief at his word? After all, even the most jaded onlooker would have to notice that Exxon’s announcement came after the tax bill’s passage.
Indeed, the list of companies that have announced positive moves in the wake of the tax bill is long and getting longer.
Still, diehard critics of the bill are not giving up. On Sunday, for example, an editorial in The New York Times sniped about the good news: “These statements are also cleverly designed public relations spin that tells us little about the actual long-term economic impact of the tax law.”
Of course, many would say that billions upon billions of new dollars poured into additional worker pay, benefits and contributions to charity are, in fact, the essence of “long-term economic impact.”
But let’s dig deeper into this issue of the long term. That is, beyond today’s headlines, will the tax bill make a meaningful contribution to the well-being of the nation in the years to come?
With an eye toward that long term, we might consider the evidence from the recent World Economic Forum in Davos. On Jan. 24, The Washington Post blared a headline: “‘Big positive surprise’ coming from Trump tax plan, CEOs say.”
The article quoted Bank of America CEO Brian Moynihan enthusing over the Trump tax cut: “Think about large global companies: They can go anywhere. They think the U.S. is the place to talk about investing in the next 12 to 18 months.”
As votes of confidence go, that was, without a doubt, a good one.
Want more evidence? Here’s another item, also from Davos, where the CEO of London-based Barclays Bank, Jes Staley, stated: “The USA has clearly embarked on a strategy to be very business-friendly as a regulatory matter and now as a tax matter.”
We can observe: When a foreign company starts noticing a positive change in the U.S. business climate, that can’t be discounted as just domestic political spin. Then Staley added a key question: “How is the rest of the world going to respond?”
One answer came from Brian Mikkelsen, Denmark’s minister of industry, business and financial affairs: “I’m quite sure, talking to Danish business leaders, that they will invest more in the States because of these tax cuts.”
In fact, all those observers are making the same basic point: Tax rates affect behavior. Taxes are, after all, a price; they affect the cost of everything, including the cost of doing business. As Nobel Laureate Milton Friedman liked to say, if you cause something to cost more, then you’ll get less of it.
It’s a simple matter of supply and demand; higher prices depress demand. To put that another way, when the tax “price” for U.S. business was high, there was less demand for the goods and services that our businesses produced —and also less demand for U.S. workers. Now, happily, that tax price is a lot lower, and there’s a lot more demand for U.S. stuff.
Indeed, back in the U.S., now that the actual hot fight over the tax bill’s passage has cooled, there’s a greater willingness to acknowledge that the new tax system is vastly superior to the old one.
Apple CEO Tim Cook acknowledged this fact, saying of the former 35-percent corporate rate, “We thought this was never good for the United States because it motivates people to invest elsewhere instead of in the country.”
The U.S. corporate tax rate, of course, has now been reduced to 21 percent.
Another company that has reacted to incentives and will be investing more in the U.S. is Verizon. In addition to new capital expenditures, the telcommunications giant recently announced that it would be allocating $400 million to award shares of the company stock to rank-and-file employees.
Why, exactly, is Verizon doing this? In the words of CEO Lowell McAdam: “What tax reform allows is for us to go hard when we get the results we’re expecting.”
That is, thanks to the tax bill, Verizon can now see better economic news in the years ahead, and so it wants to keep its workforce highly motivated to make the most of those opportunities. That’s a virtuous cycle of positive incentives and positive outcomes.
In fact, the American people are recognizing the positivity: According to a new Monmouth University poll, support for tax bill, once in deep deficit, is now even, 44-44: That's a 21-point improvement in just a month.
Yes, the news in the short term is all good. And as we have all learned, if the right policies are in place, a good run in the short term has a way of morphing into a good run for the long term.
James P. Pinkerton served as a domestic policy aide in the White Houses of Presidents Ronald Reagan and George H.W. Bush. Since 2011, he has been the co-chair of the RATE Coalition, a group that advocates for a more competitive tax code.