Cutting corporate taxes won't just make America wealthier; it will stimulate the global economy. The United States accounts for nearly a quarter of all the economic activity on this planet: What's good for America is good for all of us. Bringing down the rate from 35 to 15 percent, as Donald Trump proposes, will put downward pressure on other countries' rates, to general benefit.
Business taxes are popular with a certain kind of politician — and with a certain kind of voter — because they sound like a toll on someone else. It is very easy to whip up anger against Starbucks or Google or whoever the supposed tax dodger of the moment is. Who's going to pay for our roads and our schools and our military? Why, those greedy corporations!
But think about it. A corporation doesn't pay corporate taxes any more than your car pays the vehicle license fee. All taxes fall on human beings. When a company is obliged to give the federal government more than a third of what it makes, it has to pass those costs on – to its employees, to its suppliers and, above all, to its customers. As Ronald Reagan put it, "Government just uses businesses in a kind of sneaky way to help collect the taxes. They're hidden in the price; we aren't aware of how much tax we actually pay."
The best thing about Trump's corporate tax cut is that it makes his tariffs and import restrictions wholly unnecessary. Reduce the rate to 15 percent, and the problem of offshoring – even if you insist on seeing it as a problem – pretty much disappears. More companies will choose to make things in America, which enjoys high productivity, advanced infrastructure, a reliable legal system and a vast internal market. And that will lead to another advantage: As firms do more in America, they pay more to its Treasury. So there is no reason to fear a dropoff in revenues or, other than in the very short term, a higher deficit.
Look at our experience in the United Kingdom, where the corporate tax rate has fallen in stages from 30 percent in 2008 to 19 percent today. Most forecasters, with the exception of a handful of free-market nuts, expected a commensurate fall in the tax take. In fact, after an initial drop coinciding with the credit crunch, revenue quickly picked up again. Entrepreneurs found that it was worth their while to extend their activities, to plough more investment into their businesses, to shift production to Britain.
During the last fiscal year, according to official figures, our Treasury collected $72 billion in corporation tax – an incredible 21 percent rise on the previous year. As an aside, the opposition Labour Party is promising, among other things, to reverse almost all of that cut. But, despite the supposed populist appeal of such a pledge, it is getting nowhere because voters can see that the current policy is working.
Of course, it is. It works every time. Reduce rates, and, before long, you increase revenue. Calvin Coolidge was one of the first to see it. He cut federal income tax for those earning over $100,000 from 73 percent to 24 percent. Result? Those top earners went from paying 30 percent of a total tax yield of $700 million in 1921 to paying 65 percent of a total yield of more than a billion dollars in 1929. In other words, cutting rates doesn't just increase the tax take; it ensures that the rich pay a bigger chunk of it.
Between 1980 and 2007, the U.S. cut taxes at all income levels. In consequence, the wealthiest 1 percent went from paying 19.5 percent of all taxes to 40 percent. Reagan, in short, did something that the American Left has never managed to do: He made the rich pay more. So why not apply the same principle to business rates?
Not everyone likes the idea, of course. Tax cuts are always unpopular with people who are immune to empirical evidence — and with Democrats (but I repeat myself). Foreign socialists resent competition. Claude Bartolone, president of the French National Assembly, frets that Trump's plan will lead "to the deterioration of our public services."
Au contraire, M Bartolone. Trump's plan might just force Emmanuel Macron to follow suit, leading to general tax competition and a commensurate rise in economic activity. Without intending it, Donald Trump may become the latest American president to come to Europe's rescue.
Dan Hannan is a British Conservative MEP.