President Trump has begun his push for tax reform, and he has some good ideas. The best is his call to cut the corporate tax rate - which, at 35 percent, is the highest in the developed world. Trump wants to cut that rate to 15 percent. Congress should do so.
“We haven’t been presented with enough details to conclude whether such a plan can work, but I’ve been seeing some of my fellow economists claim - incorrectly - that we can’t afford those changes,” writes economist Tyler Cowan for the Bloomberg news service. “There are some potential problems with President Donald Trump’s proposal, but there is no fiscal reason such a tax plan ought be ruled out.”
Now, it’s true that on paper, such a cut would increase the federal deficit.
“But still, less money for the government is not the same as an economic cost,” Cowan writes. “Most versions of the plan, if executed properly on the details, would most likely boost economic output and create new jobs.”
And that would offset the deficit increase.
“The simplest way to think of an unfunded corporate tax cut is that the federal government has to borrow more money, say at rates in the range of 1 percent to 2 percent, while corporations have more money to invest,” he explains. “Estimates vary for the rate of return on private capital, but 5 percent to 10 percent is one plausible estimate. So in essence, society is borrowing money at 1 to 2 percent and may be receiving 5 to 10 percent in return. That is a net gain, not an economic cost.”
Writing in defense of Cowan’s essay, also for the Bloomberg news service, Noah Smith notes that corporate taxes are inefficient and regressive.
“Corporate taxation isn’t the greatest way of raising revenue,” says Smith. “When you tax a corporation, it’s not just the shareholders who pay. Prices for customers go up to some degree, and take-home wages for employees - both at the top and the bottom of the pay scale - go down.”
And high corporate taxes reduce the amount of money companies can invest in expansion.
“There is plenty of evidence that corporate tax cuts can raise investment levels,” Smith adds. “A 2009 paper by economists Simeon Djankov, Tim Ganser, Caralee McLiesh, Rita Ramalho, and Andrei Shleifer found that lower corporate taxes are correlated with more investment. And when Canada cut taxes for some kinds of companies but not for others in the early 2000s, the companies that got tax cuts invested more. A number of other studies find similar results. So in this climate of low investment, the U.S. should try corporate tax cuts as one method of getting businesses to spend more.”
Democrats, of course, will oppose corporate tax cuts, because in the age of Sen. Bernie Sanders’ socialism-lite, corporations are the bad guys.
But cutting the corporate tax rate isn’t about rewarding greed. It’s about freeing the country’s economy to grow and prosper.
Congress should make a corporate tax cut the centerpiece of its tax reform package.