One of Donald Trump’s core platforms on the 2016 Campaign Trail, and then as President, was lowering taxes for both individuals and corporations.
At the center of the argument for lowering taxes is that the decreased revenues collected will spur economic growth elsewhere through consumer spending and corporate investments.
This vision for lower taxes was accomplished in 2017 when the Trump Administration was able to pass the 2017 Tax Cut & Jobs Act (TCJA). This legislation lowered individual tax rates for many of the citizens in the country and brought the corporate tax rates from a relatively high 35% to a rate which was argued to be more globally competitive at 21%.
But when it comes to lowering corporate tax rates, has reality matched the rhetoric on the benefits to the American economy?
Shaviro notes that initial studies of the TCJA’s impact on corporate investment within the United States following the implementation of the lower corporate tax rates did not deliver as promised:
“For example, a study conducted by the International Monetary Fund (IMF) concluded that the growth in business investment over the 2017 to 2019 period fell short of what would be expected, either under the above argument outlined or based on the historical relationship between tax cuts and investment.“
In addition, the forecast of government revenues lost due to the tax cut appeared to be significant, perhaps outweighing any slight to moderate uptick in investment incentive created:
“…the TCJA appears to have resulted in a substantial reduction in government revenue — an estimated $275 billion, or 7.6% of government revenues that were expected before the tax cuts took place. A respected independent analyst, the Tax Policy Center, recently estimated that – even before the pandemic’s onset – the TCJA was on a path to lose $1.6 trillion of government revenues over ten years. This exceeds the initial estimate of a $1 trillion shortfall, reflecting the tepid response of investment to the lower tax rate, as well as other features of the Act.“
Another weakness of US tax law, regardless of the statutory tax rates for companies and corporations, is the ability for entities to exploit loopholes in the tax code which allow for far lower real tax rates, far below the benchmark, and sometimes nothing at all. Much of it revolves around various write offs which allow companies to deduct expenses and utilize other tax breaks to pay next to nothing. Amazon, one of the largest companies in the world is based in the United States and has paid zero taxes in recent years.
Companies also take advantage of US tax laws by housing their businesses in tax havens, such as Bermuda, so that on paper they are in fact foreign companies operating within the United States. Placing a company’s corporate residence in a foreign country allows corporations to more effectively utilize a technique referred to as “profit shifting.”
“…a multinational corporation could disproportionately report its gross income as arising in a tax haven such as Bermuda with low rates, and its deductions as arising in high-tax-rate countries like the United States. Profit shifting reflects a separation between actual economic activity and where those activities are recorded for tax purposes.“
In short, no matter the reduction in tax rate, multinational corporations in particular will always find a way to avoid paying as many taxes as possible. As long as government spending continues to balloon, the argument can be made that reducing corporate taxes can ultimately be a detriment to the country as long as these loopholes aren’t closed. Shaviro ends his assessment by contrasting proposed tax proposals by the Biden Administration which seek to make multinationals pay one way or another. This would theoretically be done by creating a broad coalition of international governments agreeing to a universal minimum corporate tax.
Still, it is not clear that raising domestic tax rates, as the Biden Administration has also proposed, would lead to any more significant income for the treasury either. It appears that ultimately, what would be best for the economy in the United States would be to overhaul the tax code to eliminate as many avenues to tax avoidance as possible. When so many of the country’s largest companies pay next to no taxes, the statutory tax rate is irrelevant, and the country will continue to lose revenues created here until that is addressed.
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