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How Corporate Tax Reform Can Grow The Economy, Restore Jobs And Lift Wages

LEWIS K. UHLER and PETER J. FERRARA 9/01/2017

The American economy suffers the highest corporate tax rates in the developed world, if not the entire world at nearly 40% (35% federal and an average of about 5% state).

By comparison, corporate rates in Asia average half that at 20.1% and in Europe less than half, at 18.9%. Ireland offers a corporate tax rate of 12.5%. Canada now has a 15% corporate rate. The United Kingdom will soon have a 17% rate. U.S. corporate taxes are outdated and counterproductive in this global environment.

President Trump has proposed lowering the federal corporate tax rate to 15%, with the same 15% rate applying to “pass through” income on mostly smaller businesses organized as partnerships, sole proprietors, and Subchapter S corporations. Even with the state corporate rates, American business would again be competitive with Europe and Asia.

Studies worldwide confirm that corporate taxes are borne mostly by workers rather than corporate investors, with 70% to 90% of each corporate tax dollar “paid” by workers in terms of lost jobs and wages. That is why the rest of the world has been so busily cutting corporate taxes over the last 25 years.

This tax incidence results because capital is more mobile than workers and able to flee tax-burdensome jurisdictions more easily for more tax-friendly business climates in today’s global economy. Workers can’t uproot their families from their homeland as easily as investors can reinvest overseas. Indeed, America’s outdated corporate income tax rates are causing capital flight from the United States.

This has been happening for years now through corporate reorganizations called “inversions.” An American company merges with a foreign company from a lower-tax, business-friendly jurisdiction, such as Canada, or Ireland, or the United Kingdom.

After the merger, the new company is no longer an American company, but Irish, or Canadian, or British. It now pays the corporate tax rates of its new country. This tax flight is happening with even major, iconic American firms, especially pharmaceutical giants.

As a result, U.S. governments lose all of the taxes formerly paid by the fleeing company. Workers lose jobs as well: Current jobs plus new jobs the company would have created. That contributes to declining demand for American labor, which slows wage growth across the board.

Capital flight has also resulted from U.S. corporations trying to protect their income from double taxation. Overseas earnings are first taxed by the foreign country where it is produced. Any after-tax profits these companies return to America must then also pay U.S. corporate taxes.

But if American companies hold that money overseas, creating jobs and increasing wages there rather than in America, they don’t have to pay U.S. taxes. That is why multinational U.S. companies now hold over $2 trillion (and growing) abroad.

This capital flight contributed to the worst recovery from a recession since the Great Depression, declining middle-class wages and incomes, and long-term economic stagnation under President Obama. President Trump proposes a one-time corporate tax rate of 10% on foreign earnings now held abroad if reinvested in the U.S. Government in the U.S. will then still derive some revenue from that money, and workers in the U.S. will gain new jobs and rising wages as well.

Based on its Taxes and Growth model of the U.S. economy, the Tax Foundation estimates that such a tax reform plan would increase real GDP by over 9%, and real wages by 8%, while creating at least 2 million new, permanent, full-time jobs. After counting the effects of increased economic growth under dynamic scoring, the reform could be revenue neutral. Computer simulations by an economics team led by Boston University Professor Laurence Kotlikoff estimated that this tax reform would increase U.S. wages and GDP by up to 8%, and actually increase annual federal revenues on a dynamic basis.

The real beneficiaries of such tax reform would be blue collar workers and the middle class, with millions more new jobs and the return of rising wages.

Uhler is founder and president of the National Tax Limitation Committee and the National Tax Limitation Foundation (NTLF). He served as a contemporary and collaborator with Ronald Reagan and Milton Friedman, in California and across the country.
Ferrara is a senior fellow at the Heartland Institute, and senior policy advisor to NTLF. He served in the White House Office of Policy Development under President Reagan, and as associate deputy attorney general of the United States under President George H.W. Bush.

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