If you listen to partisan Democrats or to the New York Times editorial board, you get the impression that the tax bill before Congress is a gift to millionaires and billionaires, and Armageddon for the rest of us.
The Times’ editors were so alarmed about Congress lowering America’s corporate tax rate, which is nearly the highest in the developed world, that it urged readers via Twitter to contact their senators. The publication even provided the congressional office phone numbers. That's admirable political activism, one supposes, but it's hardly compelling journalism.
Democrats, along much the same lines, argue that corporate tax cuts simply don’t necessarily create jobs. This is because businesses are not obliged to use tax savings to hire anyone. A video posted on Bernie Sanders’ Senate website offers a typical version of this argument. It refers to a study of corporations that keep their tax liability below 20 percent of profits through the various tax avoidance measures available in the tax code. Not only are these companies not juggernauts of job creation, but they significantly lag the economy as a whole in hiring. Instead of hiring, they tend to take their tax savings and use it to offer larger pay packages to their CEOs.
But the lesson here is not that corporate tax cuts don't and won't create jobs. Companies that spend an inordinate time scheming to avoid tax, and less time growing an efficient business, do so because the tax code encourages them to behave that way. They are slower to invest in making money the productive way because real business activity is riskier than the squeezing of every last penny out of a corporate tax return.
This is how a dysfunctional tax system such as the one we now have strangles a national economy, and it is why lower tax rates are needed without delay.
Democrats hold up and refute a crude, straw man argument that says if corporate rates are cut, businesses will have more money, and out of the goodness of their corporate hearts, they'll give it to workers. One only has to state the argument to know it's rubbish. It refutes itself. Of course, businesses don't behave that way. No one does.
But that isn't the basis of the case for corporate tax reform. Nor is it the argument that Republicans put forward. So, it really isn't an argument that opponents of tax reform should be confronting. It's too easy to defeat an argument that no one is making.
There is, though, a valid reason why both former President Barack Obama and President Trump have pushed to lower America’s corporate tax rates in recent years. It is not so corporations can keep more of the revenue they already earn, as Sanders would have his credulous supporters believe. If that were the idea, then we could just create more loopholes in the tax code so big corporations could play old cat-and-mouse games of tax avoidance to reduce their tax bills.
The impetus for tax reform begins, rather, with the understanding that this cat-and-mouse game is the problem, not the solution. And it's a game created by the tax code. It is a costly game, not just for the corporations that play it but also for the entire economy.
The main point of lowering tax rates and getting rid of loopholes is to encourage corporations to spend more time, effort, and investment on productive activity, and less time on devising new methods of minimizing tax exposure. Less productivity is detrimental to the economy.
Because the U.S. has nearly the highest corporate tax rate in the industrialized world, American companies spend a significant, even outlandish, number of man-hours and money figuring out how to avoid paying it. They exploit loopholes, forgo opportunities, and worst of all, avoid bringing their profits home for reinvestment.
Tax reform, by closing loopholes, will reduce distortions, so productive activities are prioritized over unproductive ones designed merely to win tax credits. Reform will also remove incentives for companies to move offshore and keep overseas profits abroad. Many companies would love to invest overseas after-tax profits in their American operations, but this would require them to surrender an enormous share of the money to the U.S. Treasury.
By removing incentives for irrational behavior, tax reform can dramatically increase the amount of corporate investment within America. It’s not just that corporations get some extra money to pass along. Rather, they’ll be freed up to operate in a whole new and far more efficient way that will inevitably result in new opportunities to grow and greater success against foreign competitors.
This is the more circuitous, but also the more sure-footed, path by which tax reform will produce new jobs for workers and savings for consumers.