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Not Just a War on Tax Inversions, but also a War on the Middle Class
Does the US government want to help American business or not? Does the administration want to help middle-income wage earners or not? Does Team Obama want to grow the American economy at its historic 3.5 percent long-term trend or not? Apparently, President Obama’s answer to all three questions is “no.”
Those are the real issues behind the Treasury’s latest militant attack on so-called tax inversions, where a US company merges with a foreign firm in order to take advantage of the foreign firm’s lower corporate tax rate. In this case, the attack is aimed at Pfizer, pending the $160 billion takeover of Allergan. Allergan is based in Ireland, which has a 12.5 percent corporate tax rate. Pfizer is based in New York. So the new combined entity will pay the Irish corporate rate, which is nearly three times less than the 35 percent US federal corporate rate. Obviously, a huge savings.
The answer here is simple: Slash the US corporate tax rate and then the problem goes away. It’s by far the highest of the major countries worldwide. We are not competitive. Canada is 15 percent, China is 25 percent and Europe averages 25 percent. These companies owe it to their shareholders and their work forces to act in a fiduciarily responsible manner. But no, Team Obama wants to wage war against them.
So here’s a question: Why does Obama want to punish business, rather than reward it? Why doesn’t this administration want America to be the top global destination for investment? Why not have the US win the global race for capital instead of losing it. President Obama always gives lip service to lowering the corporate tax rate, but he never specifies a particular rate or an overall plan. What’s more, he is trying to force US multinational cash abroad to pay taxes as high as 19 percent even if they don’t bring the money home. And then, there would still be taxes at 35 percent for the repatriation of their foreign profits. This is insane.
Many liberals argue that big US companies don’t really pay the top corporate rate. While this is sometimes true, it’s mainly because, during recessions, companies lose money and get a tax loss carried forward that temporarily reduces their effective rate. But during economic expansions, when profits rise, companies then do pay the top rate. So, it’s a bogus argument. General Electric, for example, may not have paid taxes for a couple of years following the Great Recession. But during the recovery, their effective rate was near 35 percent.
Then progressives argue that corporate tax cutting is a rich person’s tax cut. Utterly untrue. Numerous studies have shown that the biggest beneficiary of corporate tax cuts is the middle-income wage earner.
By the same token, companies don’t just pay corporate taxes out of their own pockets. They pass it along in the form of lower wages and benefits to the work force, higher prices for consumers, and lower stock valuations for investors. Again, the data show that wage earners get the biggest benefit, consumers second and shareholders third. One key reason why average wage earners have had virtually no pay increases in the past 15 years is the high corporate tax rate. That is why so many Americans are so angry with Washington — they want big change.
Corporate tax reform should include not just large C-corps, but also smaller business S-corps and LLC pass-throughs. And, nearly as important as cutting business tax rates, is the need to simplify the inexplicably opaque and complex system. Big firms can afford tax accountants to avoid all the K-Street cronyism and corporate welfare. Smaller firms cannot: they get the short end of the stick.
Corporate share prices should not be driven by political tax games. Profits, not Washington shenanigans, should be the mother’s milk of stocks. And this shouldn’t be a partisan political issue. Either we want to make America great again or not. Unfortunately, both Democratic candidates Hillary Clinton and Bernie Sanders oppose significant business tax relief. Much more promising, leading GOP candidates Donald Trump, Ted Cruz, and John Kasich favor slashing corporate taxes.
Fortunately, nine months is all we have left before this tax nonsense comes to an end.
Published in Culture, Economics
Make war on capital and capital will flee.
The reason most U.S. corporations don’t pay the 35% statutory U.S. Rate isn’t because they generate NOLs during recessions. It is primarily because they don’t have to book taxes at that rate on non-U.S. If they don’t repatriate the income and treat it as permanently reinvested. They get to book taxes at the local rate of the foreign jurisdiction (and the local rate is almost always lower than 35%). The U.S. also provides tax credits for some R&D and the like that bring the rate slightly below 35%. It is actually worse than this piece describes as that permanently reinvested capital rarely comes back to the U.S.
Larry Kudlow’s is now a lonely voice at National Review, where this sentiment, expressed by Ramesh Ponnuru in the New York Times, dominates:
“Cutting corporate tax rates may or may not be a good idea, but we don’t need to make it a priority to preserve our competitiveness.”
Great post, Mr. Kudlow!
On the repatriation comment, I heard there is talk of another one-time tax holiday like the one in 2004 at 5%. If $365 billion came back, then Treasury received $18.6 billion. Yet some (see Wikipedia) think this actually hurt our economy. Taxes have already been paid once on this money. Isn’t it better to have it in the US than overseas?
Assuming they do, who believes they know how?
We’re talking mostly lifelong bureaucrats who have zero exposure to the daily challenges of a private business. This would be like me telling a rocket scientist how to design a propulsion system.
Hard to see any scenario where it is “bad” for the economy but the logic is that the US government will have conditioned corporations to expect these periodic holidays further encouraging US companies to generate income offshore and then wait for the holiday. I don’t agree with that because they ain’t bringing the money back anyway but that is the logic.
Also, repatriated income is not “double taxed” as a matter of course from a US perspective. Yes, the income has been taxed in the foreign jurisdiction but US companies only owe the incremental tax due the difference between 35% and the local tax rate. It is not like double taxation of shareholder dividends.