The corporate tax rate is set to drop 14 percent under the new tax bill. Will big businesses invest more in American plants and factories? What will it mean for American workers? Economics correspondent Paul Solman breaks down the numbers.
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But now, back to the Republican efforts to pass an overhaul of the U.S. tax code. Tonight, our economics correspondent, Paul Solman, looks at some key questions surrounding the dramatic cut in corporate taxes. It’s part of our weekly series, Making Sense, and part of our ongoing coverage to understand the potential impact of the bill.
Let’s slice off the corporate tax cut, the largest and most permanent of the cuts in the bill. To spare you mind-numbing numbers popping up next to my arm here, let’s keep the math super-simple. The official top U.S. corporate rate for all firms making taxable profits in America- 35 percent, although, of course, that’s before deductions, some of which the bill would get rid of.
The top rate would drop to 21 percent. The idea- companies, enticed by a tax rate that would now be lower than before, and lower than in many developed countries, would build more plants in America instead of elsewhere — more Asian auto factories in the South, say — while fewer American companies would set up shops abroad.
The supposed result- more investment at home; more American jobs; higher wages.
So, what’s not to like?
Well, first, suppose other countries retaliate? In the past few days, for example, there’s word out of China that it may now accelerate its adoption of a VAT, a sales tax, to completely replace its corporate tax. So, maybe the tax bill triggers a global tax cut war, and America becomes less attractive to companies, not more.
A second objection is less speculative. A corporate tax cut from 35 to 21 percent will certainly cost the U.S. Treasury a bundle, even after cutting some corporate deductions. The reconciled bill is so new, the cost of the corporate tax cut hasn’t been officially projected yet, but at 20 percent, it would have cost $700 billion or so over the next 10 years. So, at 21 percent, let’s just say several hundred billion dollars or tens of billions a year, going from individual taxpayers to corporate taxpayers.
And since there are no offsetting tax increases anywhere, that’s tens of billions the U.S. will have to borrow, which means tens of billions added to the annual budget deficit, from business tax cuts alone, tens of billions a year added to our cumulative national debt, tens of billions on which we will have to fork over maybe an additional billion or more in interest until we pay it back.
The big question, then, is pretty simple- will the tax cut be worth the cost? Will companies use the billions and billions in tax incentives to invest in America and create jobs?
That’s the question put to a group of CEOs during a Wall Street Journal interview with the director of President Trump’s National Economic Council, Gary Cohn, last month.
If the tax reform bill goes through, do you plan to increase investment — your company’s investment, capital investment, just a show of hands, if tax reform goes through? OK.
Why aren’t the other hands up?
Well, given how much money firms have in the bank these days, several trillion dollars in the U.S. alone, why would CEOs invest more in America anytime soon? So, then to whom would the tens of billions a year go? Well, all the money would go to the firms, their investors, and none to workers, unless companies suddenly were graced with more of the Christmas spirit along with their tax cut.
But Kevin Hassett, the head of the president’s Council of Economic Advisors, told the Yahoo Finance Forum that the corporate tax cut will spur so much new investment here, it will lead to $4,000 more in family income each year.
Firms will start relocating activity here in the U.S. right away.
Can you put this in a timeframe?
If you go to the optimistic end of the literature, then you could expect that in three to five years, and then continuing after that. And if you go to the pessimistic side of the literature, then it would be about double that.
Hassett’s $4,000 figure is in dramatic contrast however with published estimates that workers would receive, at most, something like 20 percent of the cost of the corporate cut.
Again, the new projections aren’t out, yet, but they’re not likely to be a whole lot different from the old ones, which implied something more like a $100-a-year rise in income. In any case, the bulk of the benefits would go to investors.
This is economics correspondent Paul Solman for the PBS NewsHour.