Matthew Gardner, from the excellent Institute on Taxation and Economic Policy, made a great point in this NYT article from yesterday (a smart account of the tenuous relationship between corporate tax cuts and investment).
Mr. Gardner argued that a broader definition of American competitiveness is needed that includes not only the tax system, but also the business infrastructure that the tax system supports — bridges and roads, health care, education and research and development. “If all you think about is the tax rate, then it should be zero,” he said. “Competitiveness is about finding the right balance.”
This resonates because it gets at the many contradictions raised by team Trump’s drive to slash the corporate rate by more than half (from 35 to 15 percent). As measured by profitability, share prices, and cash reserves, the corporate sector is booming. By these concrete metrics, they’re already “competitive.”
But that word means something specific in this debate: it’s just saying that our statutory corporate rate is well above the rates that prevail elsewhere. To normal people, not steeped in this debate, the idea of closing that gap makes sense.
But here’s the thing: because of deferral–the ability to avoid US taxation on foreign profits by booking them overseas–and many other tax avoidance techniques, the gap between our the statutory rate faced by our international companies and that of our competitors is not operational.
But aren’t their foreign earnings locked up overseas, unavailable for US investment? First, I used the word “booked” for a reason. From the Times piece:
The whole notion of earnings trapped offshore is misleading, Steven M. Rosenthal, a tax lawyer and senior fellow at the Urban-Brookings Tax Policy Center. “The earnings are not ‘trapped,’” he said. “They’re not offshore. They’re not even earnings. They’re accounting gimmicks that allow earnings to be shifted abroad.”
What’s more, companies already get something akin to tax-free repatriation by borrowing against those funds, with the added bonus of being able to deduct the interest paid on those loans from their tax bill.
Second, there’s nothing stopping these cash-rich firms from investing more if that’s what they want to do. Cheap capital is plentiful.
Unfortunately, the same cannot be said for the federal government sector, which is anything but a smoothly running machine these days. It’s dysfunction is such that it is underinvesting in the public goods ticked off by Gardner above. And its majority party is proposing to significantly reduce its revenue stream, making any such investments an even heavier lift.
That’s the real threat to competitiveness.
It is well-known that private sector investment is largely demand-driven, far more responsive to the strength of the business cycle than to tweaks in the tax code. But government investment is politically driven (and disaster driven…after-the-fact). Therein lies the difference, and I’m much more worried about the gov’t sector than the corporate sector.