A recent New York Times editorial contains so many misconceptions and mischaracterizations about the newly enacted tax law, that it’s hard to know where to begin. But let’s start with the headline: “Are Corporate Tax Cuts Raising Pay? Yes, for Bosses.” By implying that tax reform’s principal beneficiaries are corporate bosses, this headline alone is completely off target.
Corporate bosses were doing well before tax reform, and they will likely continue to do well under the new tax system, especially if their companies flourish. But the significance of the new tax system is in determining where those companies flourish. Today’s globalized economy means that big corporations can and will always seek the best place to do business. Tax reform makes America that place.
In the 31 years since our corporate tax code was last reformed, America went from having a relatively low corporate tax rate to a high one — the highest among all developed countries. Why? Not because the United States raised corporate taxes, but because our competitors lowered theirs. With the explicit intent of obtaining a competitive tax advantage over the United States — and thereby promoting investment and job creation in their own countries — other countries lowered business rates and restructured their international tax systems.
As a result, over the years, America lost thousands of companies, along with good-paying jobs. According to a recent study by EY, a globally competitive US corporate tax rate of 20 percent would have kept 4,700 companies in the United States between 2004 and 2016.
The recently enacted tax law lowers the US corporate rate to 21 percent, close to the average of our major industrial competitors. That rate makes it attractive once again for companies to do what they probably would have preferred all along: to invest and hire more, right here at home. The immediate expensing provided under the new tax law also lowers the cost of investing in new equipment, making it more affordable to upgrade or build new facilities in the United States.
Millions of American workers are already realizing a payoff from these improvements in the corporate tax code (not to mention the lower individual income tax rates that almost all will pay). So far — in the few weeks since enactment of the new tax law and directly related to it — 23 Business Roundtable member companies alone have announced wage increases, enhanced benefits and more than $700 million in bonuses to more than 1.6 million non-executive employees. Many are also making larger contributions to pension funds and investments in workforce training.
Hundreds of other American companies are making similar new investments in their employees. These are substantial benefits — enabled in significant part by corporate tax reform — that make a real difference in the lives of these workers.
Announcements of immediate pay raises, bonuses, and increased retirement contributions are just a start. The larger, longer-term benefits from corporate tax reform will be realized as it unleashes increased investment in the US. That enhanced capital spending will drive increased labor productivity, which will in turn drive durable wage increases for American workers.
Beyond increased investment and direct employee benefits, some companies will also use some of the gains from tax reform to return capital to investors. Critics dismiss stock buybacks or increased dividends as a negative. But the tens of millions of ordinary Americans who own shares should disagree. It’s not just “corporate bosses” who have an interest in share prices and dividends; a majority of all American families own stock, either directly or indirectly, through mutual funds, pension funds, and retirement accounts. Just as important, money returned to shareholders of any kind recirculates throughout the economy — with some helping finance new startups, some being reinvested in growing sectors of the economy, some being saved to increase future consumption.
The Times editorial also incorrectly asserts that the new tax law grants US companies a “tax holiday” on overseas earnings. Wrong on two important counts: First, under the old tax system, the US tax owed on profits earned overseas and kept overseas was precisely . . . zero. High US corporate tax rates applied only if the cash was brought home. So, not surprisingly, American companies left much of their profits overseas. At last count in 2016, an estimated $2.6 trillion was trapped abroad. Absent tax reform, the great majority of those foreign earnings would have remained overseas, used for investment in other countries. This locked-up money, growing at 10 percent per year for the last decade, represented enormous lost opportunities for investment in American jobs.
Second, far from providing a “holiday,” the new law will now tax those pre-2018 overseas earnings (all $2.6 trillion) at a rate of 15.5 percent if held as liquid assets and eight percent on the rest. Going forward, companies will pay a minimum tax on overseas earnings (similar to the kind proposed by President Obama in 2016). These new provisions will produce more than $450 billion in additional tax collections from US multinational companies — tax dollars never owed under the old system.
Our old corporate tax system created perverse incentives for American companies to store and invest money overseas rather than here at home. Tax reform changes that — and America’s workers are the most important winners.