Stop Income Tax to Create Jobs

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What is left after such a corporate inversion is an ostensibly foreign company, but one that has changed almost nothing about its business practices except for its tax bill. It should be clear that whether a company has placed its on-paper headquarters in the U.

Economic background: The three determinants of income growth

If firms were being incentivized to actually shift production facilities overseas, then that could affect productivity and possibly employment. American corporations are forced to keep profits offshore to avoid our high tax rate, and this in turn prevents them from investing here. There is no evidence that firms would be more likely to invest in the United States if their offshore profits were repatriated.

Corporations already have the means and the incentive to increase their investment in the U. The direct evidence—of what companies actually do with repatriated offshore profits—backs this up. This argument is false in every particular. The decision of whether to invest in the U.

Large Job Growth Unlikely to Follow Tax Cuts for the Rich and Corporations

And after-tax corporate profits in the U. As Figure D shows, the recovery since the Great Recession has been the most profitable time to invest in the U. Profit rate is calculated by dividing net operating surplus by the current stock of fixed assets for the nonfinancial corporate sector. Despite these high profit rates, U. Some may argue that firms see high expected profits but do not have access to the liquid funds they need to actually make the investments that could earn them these profits.

Perhaps having profits held overseas come back to the U. Besides its large offshore holdings, the U. When internal funds are almost sufficient to finance all planned investment, the financing gap is small. During the Great Recession and early recovery, this gap went negative for an extended period as firms radically reduced their investment. Even by the end of , however, this gap was extremely small by historical standards, as investment remained weak and profitability quite high.

Specifically, it is capital expenditures minus the sum of internal funds mostly corporate profit and inventory valuations. Further, firms can borrow to invest, and the cost of borrowing interest rates is also at a historic low. In short, there is no evidence that firms would benefit at all from a repatriation of corporate profits. The reluctance of corporations to invest in the United States is not attributable to lack of available savings; instead, it is due to continued weak demand growth. In this context, the return of offshore profits to the U.

To support this conclusion, we have direct evidence on what has actually happened when multinational corporations were given tax breaks to repatriate offshore profits. In , Congress offered multinational corporations a tax rate of 5. Multinational corporations and other proponents of the holiday claimed that repatriated offshore profits would be used to invest in the U. But in a review of the evidence, Marr and Huang point out that the Congressional Research Service, the Treasury Department, and other outside analysts have found virtually no evidence this investment occurred.

On the other hand, these analysts did find strong evidence that firms used repatriated profits to benefit owners and shareholders. Further, there is little doubt that the holiday convinced firms to keep profits stashed offshore while their lobbyists work on convincing Congress to pass another holiday. This dynamic is not conducive to ending strategic tax avoidance.

This evidence surrounding the tax holiday comes as no real surprise. Proponents claim that U. Consider recent accounting maneuvers by Apple and Microsoft, who CTJ has found pay 3 and 5 percent tax rates, respectively, on their offshore profits. Both companies have recently used their offshore profits as collateral for financing debt. But rather than using this financing to boost plant and equipment investment in the U. Anticipation of further tax holidays including the largest tax holiday of them all, a territorial tax system, discussed below and the ease with which such profits are clearly accessible tax-free today for measures that return money to shareholders make it unsurprising that profit-shifting abroad has exploded since Such profit-shifting cost the U.

American corporations are double-taxed on their offshore profits when they bring them home. There is no double-taxation. However, unlike the average worker, corporations are given a loophole on any income earned offshore, with tax payments deferred until they are repatriated to the parent company in the form of dividends. This means that by funneling profits into an offshore subsidiary located in a tax haven, multinational corporations can defer paying their taxes indefinitely. This means that on net it would owe nothing.

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So no double-taxation has happened. In the far more realistic example where the multinational corporation has located its profits in a tax haven and pays nothing in taxes abroad, that corporation will owe the full U. The company is taxed once, at 10 percent abroad. However, when repatriating it faces the 35 percent rate less the 10 percent it already paid.

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The repatriated income faces a 25 percent tax rate. The United States should adopt a territorial tax system—only taxing company profits made in this country—so that American corporations can use the tax savings on foreign profits to invest and create jobs. This is because a territorial tax system is likely to have negative effects on all three of these determinants of the living standards of the vast majority.

A territorial tax system basically makes the deferral loophole permanent rather than indefinite, as offshore profits would no longer be subject to U. The incentives for tax avoidance this creates are obvious. Armed only with the deferral loophole and well-paid lawyers and accountants , multinational corporations managed to book profits offshore that accumulated to an amount equal to 13 percent of total U.

If these firms knew with certainty that they could avoid taxes forever so long as profits appeared to have been earned offshore, multinational corporations would surely further flood the offshore world with U. This would drain the U. Aside from the incentives for tax avoidance, a territorial tax system would incentivize moving investment offshore. The logic is clear for a U. Under a territorial system, this nudge becomes a hard shove.

In the long run, this shove could result in less capital investment in the U. In the short run, incentivizing multinational firms to invest abroad reduces aggregate demand, therefore weakening employment generation. Further, the territorial shift is one that would not help purely domestic firms at all; it would only provide tax advantages for large multinational corporations, likely deepening the regressivity of this shift. Cutting corporate tax rates would spur enough growth—and therefore increased tax collections—that the rate cuts would lead to only small revenue losses, or even no revenue losses at all.

Recent history shows that, in general, tax rates and total revenue move in tandem up and down, as would be expected. We analyze this argument below and show why empirically there is very little evidence that this argument applies in the current U. Recent decades show that, in general, tax rates and total revenue move in tandem up and down, as would be expected. The logic follows that if one were on this portion of the Laffer curve that is, if rates started at very high levels then rate cuts could actually boost revenue.

Logically, there is a grain of truth in this. At the extreme, a tax rate of percent really would likely lead to very small tax collections the incentive to earn income is small when percent is taxed away ; there is a theoretical tipping point at which very high tax rates would lead to decreased revenues as described by the Laffer curve. Empirically, however, there is very little evidence that the U. In the most recent deep examination of this issue, Diamond and Saez estimate that the revenue-maximizing top marginal income tax rate is 73 percent.

This finding is not out of line with a broader view of the literature. These revenue-maximizing top rates are substantially higher than the top statutory rates in the United States today. But those levels are focused on the individual income tax side—what about for the corporate income tax? Proponents of corporate tax cuts argue that the peak of the Laffer curve i. Gravelle and Hungerford , however, respond to these studies, providing a detailed rebuttal of their findings and estimating much higher revenue-maximizing rates.

At the level of theory, Gravelle and Hungerford show that even with models based on extreme and implausible assumptions specifically intended to find large effects of tax rates on investment, revenue-maximizing rates for corporate taxes should hover close to the labor share of income in the economy. At the statistical level, Gravelle and Hungerford show that empirical estimates of very high responsiveness of investment to tax rates are not robust to even minor changes in specifications. Given this, there is very little evidence that economic activity would increase enough in response to cuts in corporate taxes to neutralize the revenue loss.

She notes that low revenue-maximizing rates could be driven by firms that are shifting their profits into low-tax jurisdictions or engaging in general tax avoidance. This highlights again that economic decisions may not be much affected by corporate tax rates, but accounting decisions may. But accounting rules can be changed and loopholes closed. This argues for closing the loopholes, not lowering rates. Double-taxation is not a phenomenon that is special to corporations; labor income is also double-taxed.

Further, the extent to which this double-taxation inflates average taxes paid on capital income is often wildly overstated. Overall, there has in fact been a massive erosion of taxation on capital income. The alleged unfairness of double-taxation is often invoked by proponents of cutting corporate income taxes. It is largely a red herring.

But labor income is double-taxed as well—facing both payroll taxes and income taxes. And the extent to which this double-taxation inflates average taxes paid on capital income is often wildly overstated. In fact, combining the decline of taxable corporate stock with the pervasiveness of corporate tax avoidance implies massive erosion of taxation on capital income. Since capital income is heavily concentrated at the top of the income distribution, this has significant consequences for the progressivity of the tax code.

Finally, we should note that many proponents of corporate tax rate cuts have taken to arguing that its real incidence is on labor , pointing to a number of recent studies. These studies have been found to be flawed, 12 but if they were taken at face value, this would necessarily imply that corporate profits were not being taxed twice. Yet proponents of these cuts often argue both that cutting corporate taxes will benefit workers, not capital owners, and that cutting corporate taxes is only fair because capital incomes are being taxed twice.

These are not compatible arguments. If corporations were allowed to immediately expense all costs, rather than having to depreciate certain big-ticket purchases over time, they would invest more in the economy. American corporations are already seeing historically high after-tax profits. If investment is lagging, it reflects a lack of demand in the market, not profitability that has been sabotaged by tax law. Immediate expensing is a bit of a technical point, but it relates to how corporations are taxed based on the costs of durable capital investments.

Business costs for assets that will depreciate over time are not immediately deducted; instead, they are written off on a depreciation schedule spanning a number of years depending on the type of the asset.

Immediate expensing would allow such assets to be written off the year they are bought, even though the assets continue to provide useful services and usually are paid for over a long period of time. Immediate expensing is aimed at reducing the marginal effective tax rate on certain types of new investments. We note in previous sections the problems with such a focus on savings and investment as solutions to the current challenges facing the economy. In addition, we can get more specific about what to expect from immediate expensing by looking at the evidence from previous bonus depreciation policies.

Bonus depreciation resembles a move toward immediate expensing. With bonus depreciation, businesses are allowed a bonus amount of deductible depreciation in the first year above what is normally available. Bonus depreciation has been in and out of effect since , and typically the bonus has been around 50 percent of the cost of the asset. The available evidence indicates that bonus depreciation, like a corporate income tax cut, does not boost aggregate demand by much, making it a poor stimulus measure. This is far from shocking—corporate rate cuts through any means are simply not a very valuable stimulus measure, as the benefits accrue to high-income households that will save a large portion of any extra dollar coming their way.

The effects on productivity from an effective rate cut are likely to be quite modest even in the long run and even if the economy reaches and stays at full employment. And, in this full-employment long run, these rate cuts will provide no boost at all to productivity unless they are somehow paid for. Corporate income taxes have been taking up less and less of the overall tax burden over the past generation, even as owners of corporations have done extraordinarily well in the era of ever-rising inequality.

Despite this, many continue to call for the corporate tax burden to be further reduced by cutting the tax rates these businesses face. These calls are often dressed up with claims that rate cuts will somehow boost the economy and help low- and middle-income American families who have seen such slow growth in their living standards over the past generation.

These claims are clearly wrong. The idea that corporate rate cuts are a good strategy for boosting the incomes of low and middle-income families is misguided if not outright deceptive. Rate cuts would not just fail to boost incomes for the vast majority; they would also deprive the federal government of the revenue it will need in coming years both to honor the commitments it has made to provide social insurance and a safety net and to maintain let alone expand needed public investments.

If rate cuts were proposed as part of a policy package that also included strategies to stem the erosion of the corporate tax base and result in at least revenue neutrality, a fruitful discussion might be possible. But in tax policy proposals, too often the rate cuts are specified and immediate and concerns about how to broaden the tax base are largely ignored. Corporate tax reform needs instead to restore the severely eroded corporate income tax base by closing huge loopholes. Josh Bivens joined the Economic Policy Institute in and is currently the director of research. His primary areas of research include macroeconomics, social insurance, and globalization.

He has authored or co-authored three books including The State of Working America, 12th Edition while working at EPI, edited another, and has written numerous research papers, including for academic journals.

He often appears in media outlets to offer economic commentary and has testified several times before the U. He earned his Ph. Hunter Blair joined EPI in as a budget analyst, in which capacity he researches tax, budget, and infrastructure policy. He attended New York University, where he majored in math and economics. Gravelle and Hungerford provide theoretical and empirical criticisms of analyses claiming to find that the revenue-maximizing top corporate tax rate is close to 30 percent.

This appendix provides some help in interpreting their theoretical criticisms. A low revenue-maximizing top corporate tax rate is possible theoretically in small open economy models. These models assume that the prices of goods and interest rates and rates of return on capital are set by global, not domestic, markets. But open economy models offer an added channel through which revenue-maximizing corporate tax rates could be reduced.

In an open economy model, it is at least theoretically possible for capital to flow significantly in and out of a country as differences in tax rates between countries increase or decrease. If it were true that international capital flows are extraordinarily sensitive to corporate tax differences, then higher corporate income taxes in the U. Brill and Hassett in particular point to elasticity estimates of foreign capital flows to after-tax returns in the range of 1. However, Gravelle and Hungerford show that even the small open economy assumptions are not enough to be consistent with empirical estimates of revenue-maximizing corporate tax rates as low as 30 percent.

Instead, they point out that so long as the labor share of income is high i. The intuition can be illustrated with some algebra. Assume that there is just one good produced and consumed in the economy. In expression 1 below we show that the output of this good can be measured as its price p multiplied by the quantity produced and consumed X. Essentially, the price of any good is the cost of the labor and capital used to produce it. Now, introduce a tax on capital the corporate income tax, t.

Expression 3 includes this tax rate in our expression for price changes. This expression highlights that there are three potential ways for the incidence of this tax to be distributed—it can push up prices and be paid by consumers, it can reduce pretax rates of return on capital and be borne by capital owners, or it can lead to lower wage rates. The small open economy model rules out the first two channels of incidence by assumption—both prices and rates of return are set entirely at the global level and hence are fixed in our domestic economy.

This means that the incidence is borne by labor, and it also lets us express wage growth as a function of the corporate tax rate, as in expression 4 below:. The economic channel through which corporate tax rates lower wages in this small open economy model is reduced capital investment. The small open economy assumption holds r and p fixed. Combining expression 5 with expression 4 gives us the change in capital investment as a function of the corporate tax rate:.

Setting this change to zero to maximize tax collections yields the result that the revenue-maximizing tax rate is just the labor share of income divided by the elasticity of substitution between labor and capital. The labor share of corporate sector income is easy to observe in economic data—it hovers between 75 and 80 percent, depending on the phase of the business cycle. The elasticity of substitution between labor and capital is a well-researched topic, and the consensus of estimates is that it should be expected to be less than 1 generally.

If we liberally estimate that this elasticity is 1, this implies a revenue-maximizing rate of 75 percent. If the true value is less than 1 which is likely, given the preponderance of econometric evidence then the revenue-maximizing rate actually increases. In short, the Gravelle and Hungerford results show that even with assumptions that create an infinite elasticity of foreign capital flows to after-tax returns, the open economy model is still quite inconsistent with a 30 percent revenue-maximizing corporate tax rate given relatively clear evidence on the labor share of income and the elasticity of substitution between labor and capital.

And, of course, it should be apparent how wildly unrealistic it is to assume that the U. The destination-based cash flow tax or DBCFT is a wide-ranging reform of corporate taxation that taxes sales including imports instead of profits, and that exempts exports. These profits are distributed to households in the form of dividends, capital gains, or exercised stock options. So, for example, property taxes are paid by the owners of property, but if a landlord rents an apartment to a tenant, it is almost surely the case that the renter ends up paying or bearing the incidence of at least some of the property tax through higher rent payments.

Of course, many American households receive significant income from pensions or government transfers as well i. Since corporate tax rate cuts have little direct effect on these income flows, we largely ignore them. Since cutting corporate taxes would put pressure on policymakers to either raise other taxes or reduce spending including transfers , it seems clear that the political effect of corporate tax cuts would be negative even for the future prospects of transfer income recipients.

Introduction and key findings

His argument was that proponents of any particular trade policy had to answer how their preferred policy would boost productivity or, the amount of income generated in an average hour of work , period. The Krugman argument was valuable in cutting through confusion in seemingly abstruse economic policy debates. But it was incomplete. Boiling down the effect of economic policy changes to what they do for productivity alone is essentially assuming that a the economy is always pinned at full employment and that b rising inequality will not put a wedge between economy-wide productivity growth and what actually accrues to the incomes of the vast majority.

Recent years have shown strongly that the influence of policy changes on productivity growth must share center stage with the influence of these changes on employment generation and income distribution. This observation that interest rates are low and that the economy likely has a glut, not a deficit, of savings, is the mirror image of the argument in the previous section that employment generation has been constrained by insufficient aggregate demand for many years.

In fact, Eggertsson and Krugman argue that tax cuts that incentivize savings can actually reduce economic activity and investment in an economy where short-term interest rates are pinned close to zero. This is because as households try to save, they by definition are cutting back on consumption spending. This cutback in consumption reduces aggregate demand. In a healthy economy, the cutback in consumption spending is neutralized by the rise in capital investment that seamlessly channels savings into demand for new capital goods.

But when the economy is not healthy, and savings is not being seamlessly translated into new investment, the consumption cutback just reduces aggregate demand, period. Such transfers are tightly targeted at the bottom half of the income distribution. It is obviously much more complicated to determine how to assign the incidence of government spending on agencies like the Department of Labor or the Environmental Protection Agency.

CBO generally assigns the incidence of this type of government consumption and investment spending either proportionally to the existing income distribution or equally across the population. For the purpose of providing a clearer explanation, we ignore here the slight difference between what current laws would refer to as a U. To understand the intuition behind the mirror-image relationship between the current account and capital inflows, take the example of the United States, which generally sees imports exceed exports in a given year. This trade deficit implies that residents of other countries have sent us more goods than we have sent them in return.

But since residents of any country do not generally give goods away for free, there must be some corresponding flow of payments to make up the difference. Generally, the excess of imports over exports is financed by U. This means our negative trade deficit is matched by foreign inflows of money buying U.

See Gravelle and Hungerford for a review of these studies, as well as a critique of many of them. A Modern Corporate Tax. Bivens, Josh, and Lawrence Mishel. Brill, Alex, and Kevin Hassett. Revenue-Maximizing Corporate Income Taxes: AEI Working Paper no. Fixed Assets [data tables]. Reed College Department of Economics. The Distribution of Federal Spending and Taxes in Rates, Bases and Revenues. Oxford University Centre for Business Taxation. Diamond, Peter, and Emmanuel Saez. From Basic Research to Policy Recommendations. Eggertsson, Gauti, and Paul Krugman.

Durlauf and Lawrence E. Most Large Profitable U. Gravelle, Jane, and Thomas L. Should We Really Believe the Research? Accessed March 28, Marr, Chuck, and Chye-Ching Huang. Center on Budget and Policy Priorities. The Sorry State of Corporate Taxes: Citizens for Tax Justice. To attribute to people who have advocated the opposite in policies is not only inaccurate but poisons the debate on public issues". Economist Thomas Sowell has written extensively on trickle-down economics and loathes its characterization, citing that supply-side economics has never claimed to work in a "trickle-down" fashion.

Rather, the economic theory of reducing marginal tax rates works in precisely the opposite direction: The economist John Kenneth Galbraith noted that "trickle-down economics" had been tried before in the United States in the s under the name "horse and sparrow theory", writing:. David Stockman has said that supply-side economics was merely a cover for the trickle-down approach to economic policy—what an older and less elegant generation called the horse-and-sparrow theory: Galbraith claimed that the horse and sparrow theory was partly to blame for the Panic of What I want you to understand is the national debt is not the only cause of [declining economic conditions in America].

It is because America has not invested in its people. It is because we have not grown. It is because we've had 12 years of trickle-down economics. We've gone from first to twelfth in the world in wages. Most people are working harder for less money than they were making 10 years ago. In New Zealand, Labour Party Member of Parliament Damien O'Connor has called trickle-down economics "the rich pissing on the poor" in the Labour Party campaign launch video for the general election. A study by the Tax Justice Network indicates that wealth of the super-rich does not trickle down to improve the economy, but it instead tends to be amassed and sheltered in tax havens with a negative effect on the tax bases of the home economy.

In , Pope Francis referred to "trickle-down theories" in his apostolic exhortation Evangelii Gaudium with the following statement No. Some people continue to defend trickle-down theories which assume that economic growth, encouraged by a free market, will inevitably succeed in bringing about greater justice and inclusiveness in the world.

A paper by researchers for the International Monetary Fund argues that there is no trickle-down effect as the rich get richer:. In contrast, an increase in the income share of the bottom 20 percent the poor is associated with higher GDP growth. A report on policy by economist Pavlina R. Tcherneva described the failings of increasing economic gains of the rich without commensurate participation by the working and middle classes, referring to the problematic policies as "Reagan-style trickle-down economics," and "a trickle-down, financial-sector-driven policy regime".

In the presidential candidates debate, Hillary Clinton accused Donald Trump of supporting the "most extreme" version of trickle-down economics with his tax plan, calling it "trumped-up trickle-down" as a pun on his name. From Wikipedia, the free encyclopedia. This article is about the political term. For the marketing phenomenon, see trickle-down effect. The Cross and Reaganomics: Conservative Christians Defending Ronald Reagan. The Education of David Stockman. Causes and Consequences of Income Inequality: Retrieved June 25, Retrieved November 25, The New York Times. Retrieved August 6, The Power "to Coin" Money: The Exercise of Monetary Powers by the Congress.

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