“It’s not a matter of trying to give the companies more money,” said Alan Viard, a former Federal Reserve economist.
The Senate Finance Committee version of the tax bill would hand corporations $682 billion over the next decade that they otherwise would have sent to the Internal Revenue Service, according to the Joint Committee on Taxation.
Supporters of the bill say it will unlock funds for more business investment, lower the price of capital, and help the U.S. maintain its global competitive advantage. More than eight years after the end of the Great Recession, business investment — although increasing over the past year — remains anemic. Cutting the corporate tax rate will make the United States a more attractive place to invest, which will help create jobs and boost wages, Republicans say.
Yet, there are disputes over whether the lower rate will actually trigger the advertised investment surge. Edward Kleinbard, a University of Southern California tax law expert, says a provision allowing businesses to immediately deduct the full cost of equipment purchases would have a far greater impact than the rate cut. “Allowing expensing on new investments is more targeted,” he said.
Investment actually fell in the first years following the last corporate rate cut in 1986, according to Commerce Department statistics. Many chief executives already have said that they plan to return tax cut proceeds to shareholders rather than build new factories or hire more workers.
Bank of America Merrill Lynch surveyed 302 companies in July and found that 65 percent said they would use the tax cut to pay down debt while 35 percent planned new capital spending.
Even some proponents sound lukewarm. “I don’t think there’s a top tax expert in the country who thinks this is really good tax reform,” said economist Laurence Kotlikoff of Boston University, whose research showing a potential $3,500 annual jump in wages for the average working household has been cited by the White House in support of the planned cuts.
The White House claims the tax cut would lead to a $4,000 a year pay hike for the average household. However, that estimate has been widely criticized.
The White House Council of Economic Advisers says that “the primary mechanism” by which a corporate tax cut would boost output is by reducing the cost of capital.
Yet capital already is both cheap and plentiful. Corporations are sitting on a $2.3 trillion mountain of cash, and those with a triple A credit rating can borrow for 20 years at just 3.5 percent interest, more than 2 percentage points less than the long-run average, according to Moody’s.
Most companies “are not cash-constrained,” said Martin Sullivan, chief economist for the nonprofit Tax Analysts.
Companies such as JPMorgan Chase, Twitter and Eaton Corp. all touted best-ever financial results this year and corporate profits are now twice as large as they were when Ronald Reagan left office, relative to the size of the economy.
“Profits are really, really high,” said Steven Rosenthal, a tax law expert at the Tax Policy Center.
Republicans say that the United States needs to cut its corporate tax rate to keep pace with a global trend that has dropped average rates by roughly 40 percent since 1980. Taking into account the size of countries’ economies, the average statutory corporate tax rate is about 29 percent. A total of 75 countries have rates of 15 percent or less, although most are small economies, according to the Tax Foundation.
The U.S. rate was last changed during the bipartisan tax overhaul of 1986, to 35 percent from 46 percent.
Over several decades, Washington has tapped corporations for a shrinking share of the federal government’s bills. In 1967, as President Lyndon Johnson expanded the Great Society at home and waged war in Vietnam, corporate tax payments accounted for nearly one-quarter of government revenue. In 2016, by contrast, the corporate contribution to the federal government was less than 10 percent, according to the Congressional Budget Office.
Still, the U.S. tax burden is blamed for 60 companies since 1983 shifting their tax residence to other countries in a process known as “inversion,” CBO said in a September report.
Vice President Pence said last month that cutting corporate taxes would help U.S. companies battle foreign rivals. “American companies will be more competitive on the world stage,” he wrote in a tweet.
But investors seem unconvinced that taxes are hobbling U.S. corporations. Eight of the world’s 10 largest companies measured by market capitalization — including Apple, Google parent Alphabet and Microsoft — hail from the United States.
U.S. dominance isn’t limited to high tech. Eight of the world’s 10 largest retail companies and six of the largest banks call the United States home, despite Republican concerns about an onerous tax code.
Indeed, the share of total U.S. taxes paid by corporate levies is equal to the Organization for Economic Co-operation and Development’s 35-nation average. As a group, American corporations also pay significantly less than some of their major competitors.
Japanese corporations bear twice as heavy a total tax burden, including all levels of government, while German corporations pay the same share as U.S. companies, according to the OECD.
A successful Republican push to cut the U.S. corporate rate also could trigger further reductions by other nations, economists say. “If it does, it will dilute the competitive advantage we’re getting from doing this,” says Viard, of the American Enterprise Institute.