The international view on federal taxes

James Freeman:

“We’re going to give the American people a huge tax cut for Christmas. Hopefully that will be a great, big, beautiful Christmas present,” said Mr. Trump. “Corporate rate will be reduced from 35 percent all the way down to 20 percent, which will make us competitive again, and companies won’t be leaving our country.” He added that “our tax plan will return trillions of dollars in wealth to our shores so that companies can invest in America again.”

Overseas, there seems to be some concern that Mr. Trump and tax reformers in Congress are about to do exactly that. The long-running Cantillon column in the Irish Times noted over the weekend that Thursday’s U.S. House vote to cut taxes “is highly significant” and that most Republicans in America “are united behind reforming the corporate-tax system.” The column in the Dublin-based newspaper added:

This is unsettling for Ireland. Addressing the House this week, Paul Ryan – a proud Irish-American – cited the example of Johnson Controls, a company that has had roots in his home state of Wisconsin since the 1880s but is now based in Ireland. The new tax system will help make the United States “the most competitive place in the world”, he said. Worrying words for Ireland.

This is the corporate taxation equivalent of the New England Patriots suddenly becoming concerned about the competitive threat posed by the Cleveland Browns. With its 12.5% tax rate on business income, Ireland has for years been pulling corporate headquarters away from the United States and attracting investment from all over the planet. Ireland routinely has the fastest-growing economy in the euro zone, so we can only imagine how Europe’s also-rans feel about the prospect of the U.S. economy suddenly becoming much more competitive.

Some Europeans have been urging us for years to get our house in order. An official with the Organization for Economic Cooperation and Development, a Paris-based association of industrialized economies, co-authored a 2016 diagnosis of the U.S. problem:

The United States’ 39 percent combined statutory corporate tax rate is the highest among the largest 50 economies. The American tax and accounting system has trapped over $2 trillion of deferred taxable income as “permanently reinvested” offshore. It encourages the acquisition of U.S. headquartered companies by foreign companies, and then allows foreign companies to strip taxable income from the US activities. This system is bad for domestic job creation, penalizes the entire U.S. economy, and needs to be fixed urgently.

Although the Obama Administration never acted on this advice, they acknowledged the benefits for U.S. workers that would result from lower marginal tax rates on corporate income:

When effective marginal rates are higher, potential projects need to generate more income if the business is to pay the tax and still provide investors with the required return. Businesses will therefore limit their activities to higher-return projects. Thus, all else equal, a higher effective marginal rate for businesses will tend to reduce the level of investment, and a lower effective marginal rate will tend to encourage additional projects and a larger capital stock. Increases in the capital available for each worker’s use, also referred to as capital deepening, boost productivity, wages, and output.

That’s a passage from the 2015 Economic Report of the President, and Team Obama even recognized in a footnote the research on this topic conducted by Kevin Hassett, who now chairs President Trump’s Council of Economic Advisers.

Yet now that Mr. Hassett and his boss are promoting a reform of corporate taxation to achieve the goals sketched out by Team Obama, former Obama advisers like Larry Summers and Jason Furman are railing against it. Are they nervous that the resulting Trump economy will compare too favorably with the Obama economy?

Mr. Summers for his part has lately been warning that countries might get into a race to lower corporate tax rates. In a world threatened by North Korean missiles and Islamic terror, he now asks us to be concerned at the possibility that the whole world might decide to encourage economic growth and job creation. That’s a world we want to live in.

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