Tax Reform Offers Opportunity to Boost Economic Growth

Tax reform is back on the legislative agenda, as is the opportunity to help the U.S. economy. President Trump’s plan includes a reduction in the corporate tax rate to 20 percent and a one-time repatriation tax of what officials say could wind up being 10 percent. Research shows that this would be a step in the right direction.

The United States has the highest corporate tax rate in the world, currently standing at 35 percent. By contrast, Canada’s top rate is 26.5 percent, Norway’s 24 percent, and the UK’s 19 percent.  The exorbitant rate discourages American multinational companies from bringing foreign earnings back from abroad; domestic investment suffers as billions of dollars of earnings never return to the United States.

Given the opportunity of a lower tax rate or a temporary tax holiday, American firms would use some of those billions to create jobs here at home, according to a 2011 study by the Berkeley Research Group. Capital-constrained firms, those with difficulty raising capital in the markets, such as energy, consumer goods, and retail companies, would use the repatriated money to invest in new factories and equipment, creating new jobs.

Firms without such difficulty raising capital would give repatriated earnings back to their shareholders. Shareholders, in turn, would use this money to increase their spending, as consumer confidence would grow.

The study shows that most of the benefit of repatriated earnings would flow to capital constrained firms, and ultimately to job creation, as spending on investment increases the need for more labor. Firms want to invest in the United States, but with the high corporate tax rate, they find it prohibitive to do so. The president’s tax plan can help with that.

A previous example of a successful tax repatriation holiday occurred in 2005, when domestic companies brought back $312 billion in overseas profits as the corporate tax rate dropped to 5.25 percent. Harvard Law School’s Thomas Brennan showed that most of the repatriated earnings were spent on debt reduction, new acquisitions, and research and development. However, given the temporary nature of the tax holiday, firms did not use the cash for long-term investments such as capital and labor expenditures, which is why the one-time repatriation tax should instead become a permanent policy measure, as argued by the Tax Foundation and my colleague Marc Scribner. A tax holiday is not enough to spur the investment this country needs; a permanent lowering of the corporate tax rate is necessary.

President Trump and Congress have a chance right now to help boost the American economy and create jobs here at home; they can lower the corporate tax rate and allow firms to bring back their overseas earnings to the benefit of every American.