The GOP’s Latest Corporate Tax Plan Is Economically Illiterate

February 16, 2017

For decades, the Republican Party’s signature economic policy agenda has been to reduce taxes on the rich. In order to justify their agenda, the party has developed an elaborate ideology of taxation that says taxing the rich makes them less likely to do things in the public interest, like supply their highly-skilled labor and invest in the economy’s productive capacity.

According to this theory, economic problems like underinvestment, underemployment, and macroeconomic slack are caused by heavy tax burdens on rich people and the big companies, and the sole solution is to ratchet down top tax rates.

The latest corporate tax plan from the Congressional Republican party is more of the same: an enormous reduction on the tax burden on corporations, and a shift of the fiscal burden previously born by those corporations toward the poor, in the form of a brand new tax on imports. As usual, Republicans have trotted out the claim that corporations aren’t investing because their taxes are too high and that we are losing out to other countries, which have lowered corporate taxes in order to make themselves more attractive to globally mobile capital. Republicans argue that the United States should do the same, converting itself into a corporate tax haven – a “business-friendly” environment where corporations can set up their headquarters without fear that too much of their profits might be taxed away by the federal government.

Today, my colleague Eric Bernstein and I released a paper about why this is a bad idea and why the plan will fail to stimulate growth, as multiple similar plans have failed before.

  • It’s been tried before and it hasn’t worked.
  • The assumptions about how the economy works that underlie the theoretical arguments in favor of the plan are just plain inconsistent with what we know about what’s currently wrong with the economy. Corporate profit margins are high and the cost of capital is low, yet corporations still aren’t investing what theory predicts they “should.” That is caused by uncompetitive markets, in which corporations face no pressure to expand and innovate because their market share and profits aren’t at risk.
  • Turning the United States into a corporate tax haven will worsen the international race to the bottom when it comes to taxing corporations, but it will do nothing to re-patriate outsourced jobs. It will not shift the trade balance in favor of the US, so much as sever integrated supply chains that are the best, most pro-American aspect of the existing trade regime and a low-tariff regime that otherwise tilts in favor of corporate power and the threat of outsourcing.
  • Levying a tax on imports shifts the tax burden toward the poor, who consume a disproportionate share of imported goods. A regressive shift in the tax burden is the last thing we need when inequality is higher than it’s been in 100 years.
  • In the long-run, reducing corporate taxes further skews power within corporations toward their wealthiest stakeholders, worsening the problem of low investment and stagnant wages, at the expense of either large payouts to shareholders, or simply retained earnings within the corporations, which become tax shelters unto themselves.

Policymakers should treat the Republican tax plan as the economically illiterate, elitist giveaway that it is. The primary beneficiaries will be billionaires and corporations who bankroll Republican campaigns, and its benefits will scarcely reach the American workers and consumers to which it will be marketed.

Unfortunately, the plan’s passage is nearly inevitable. When it fails, economists should take that opportunity to reconsider why the economy isn’t working as well as we would hope, and ask what that implies about conservative theories of taxation. It’s time for a revolution in tax policy that recognizes the economic value in progressive taxation as a mechanism for redistributing power and realigning incentives in the public interest. Both healthy incentives and an equitable distribution of power are prerequisites to getting our economy to operate in the public interest, rather than the interest of the few.