By Richard Scurry and Colin Hanna
As the tax reform bill heads onto the floor of the US Senate, the single element that seems to draw the most fire from the left is actually the most valuable one to returning our economy’s growth rate to the 3-4% range rather than the moribund rate of the Obama years, less than 2%. That most element is the proposed reduction in the corporate tax rate from 35% to 20%. That rate reduction obviously benefits corporations, but does it do so at the cost of delivering benefits to working families? That’s certainly the charge from Senate Minority Leader Chuck Schumer, and it’s clearly the charge that the mainstream media accept as valid. So the question we will take on in this column is how will cutting the corporate tax rate to 20% help the working family?
Both the House and Senate are properly focused on stimulating economic growth, because it is growth alone that can at the same time create jobs and reduce the federal budget deficit. The primary reason why the proposed corporate tax rate cut is an economic growth stimulant that will help the average working family is that lower business taxes will allow American companies to compete better with foreign companies in this global economy.
One of the primary goals of intelligent and fair tax reform should be to help US companies export. The current tax law makes it much more attractive for US companies to set up foreign subsidiaries to sell to world markets. With increased exports, companies will hire more workers here and promote some of those already on board. That helps working families.
Both the House and Senate tax reform proposals eliminate loopholes that are used by the largest corporations to reduce their tax rates ” loopholes that are often economically inefficient and available only to our largest corporations with enormous tax and legal staffs, giving them an unfair export advantage over domestic small businesses. Eliminating loopholes will be fairer to all taxpayers and will reduce the corruption in Washington. That corruption benefits the wealthy more than the average taxpayer, including workers.
The great majority of companies will end up with more cash if corporate rates are lowered. The question is, what do they do with it? First, they will look at what domestic competitors might do, and then their foreign competitors. Then, they will decide how to split the cash among the following major alternatives:
1. Increase wages – either to make sure they keep their best employees or to hire better employees from their competitors. Recent studies have shown that an increase in average wages has resulted in other countries that have lowered taxes. [Richard: do you have a source for this?]
2. Lower prices – either to beat the competition or to increase sales. Workers obviously benefit from paying less for their purchases and stretching their dollars further.
3. Buy new production equipment or technology, which make workers more productive and thus more valuable. Note that higher productivity is a key driver of worker wages. Further, the country must have greater productivity to grow the economy faster than the population is growing. That’s economics 101, a course that too many in the media especially appear not to have taken.
4. Increase dividends to shareholders. This will provide additional income directly to individual citizens while at the same time raising stock prices. Middle income retirees in particular will benefit. The workers at those companies will also benefit from working for growing companies.
In fact, the single biggest benefit for the worker will be a faster-growing economy. Faster growth means more jobs, higher pay, and more tax revenue to reduce the national deficit and eventually the national debt.
There is one area where our largest corporations do need a break ” a break that will stimulate our entire economy if the right policy is chosen. Right now, US Corporations, mostly the largest ones, have parked nearly three trillion dollars in cash overseas. They’ve paid the foreign taxes and probably already used the foreign tax credit to offset their domestic taxes.
If the cash just stays there, they can count it as part of their retained earnings, which helps their stock prices. But if they bring it home, it’ll cost them up to 35% to do so. So, they let it sit overseas, or they reinvest it overseas. Yet if that money were to come back to our country, where it could be paid out as dividends or invested in new manufacturing capacity or new hires, it would be a huge stimulus. Remember the 2009 stimulus package? It was about 800 billion. The current foreign cash stash is over three times that big.
So, here’s an idea for the Senate to consider adding to their bill: Offer a special lowered tax for one year of ten percent for repatriated foreign cash, and no tax at all for foreign cash that is brought home and distributed in that same year as dividends to US taxpayers. After one year, they’d need to pay the new corporate rate of 20% when they bring foreign profits home, which is still a lot better than the present tax code permits. With such an incentive, we think you could see not only a big boost to our economy but also increased tax revenue to the federal government from money that right now is producing no tax revenue at all as it sits unproductively in foreign accounts.
Richard Scurry of Charleston, SC is a retired financial services executive. Colin Hanna of West Chester, PA is President of Let Freedom Ring, www.LetFreedomRingUSA.com