Doubts arise whether corporate tax cut would boost growth
WASHINGTON » For President Donald Trump, what’s good for General Motors is great for American workers. Same for Boeing. And AT&T. Not to mention small businesses.
Trump insists that slashing the corporate tax rate from 35 percent to as low as 15 percent would free up valuable cash. Companies would use the money to boost investment, increase employees’ pay, accelerate hiring and speed economic growth. What’s more, corporations that now keep trillions overseas to avoid U.S. taxes would bring the money home. American companies could better compete with rivals based in countries with lower tax rates.
“We’re going to have magnificent growth,” Trump declared aboard Air Force One on Thursday. “We’re going to go like a rocket ship.”
Would we? Many economists, tax experts and even some business owners say it’s unlikely. Rather than hire, companies might use much of their tax savings to buy back their stock or increase their dividends to investors. Many companies, they note, have already been able to borrow at historically low rates to expand their businesses yet have chosen not to.
“The mainstream economic evidence is that the bulk of corporate tax cuts go exactly to whom you would expect — which is wealthy investors and executives,” said Chye-Ching Huang, deputy director of federal tax policy at the left-leaning Center on Budget and Policy Priorities.
Many economists foresee some benefits from overhauling and simplifying the corporate tax code, just not the extreme growth Trump is promising.
One reason corporate tax cuts might provide little overall benefit is the relative health of today’s economy. Unemployment is already unusually low at 4.4 percent. The economy is in the ninth year of a slow but steady expansion, rather than in a downturn in which tax cuts might deliver a major boost.
In a 2014 paper, two economists — Alexander Ljungqvist of New York University and Michael Smolyansky of the Federal Reserve — concluded that state corporate tax cuts did little to strengthen economic activity unless the cuts were made during a recession. (The flip side is that they found corporate tax increases to be “uniformly harmful.”)
Nor have previous efforts to reduce corporate taxes generally delivered as advertised. Kansas, for example, exempted hundreds of thousands of businesses from corporate taxes and cut individual rates in 2012, only to face a revenue squeeze as the intended economic growth never materialized.
The federal government provided a tax “holiday” on overseas profits in 2004 to bring money back into the United States at a discount to the 35 percent rate. But the Obama administration observed later that the move had diminished tax revenue and unintentionally led companies to hoard cash abroad in hopes of receiving that discount.
There is also concern that a corporate tax cut would swell the federal budget deficit. When the nonpartisan Tax Policy Center published an analysis this week, it found that even if virtually all tax breaks were eliminated, the corporate rate could drop only to 26 percent without increasing the deficit.
In this Sept. 14, 2017, photo, President Donald Trump talks with reporters after landing on Air Force One, in Fort Myers, Fla.