The link between an attractive business climate and jobs and wages has been widely acknowledged across the political spectrum. Take our neighbor to the north. Canada currently has a federal corporate-tax rate of only 15 percent, and it started its path toward Art Laffer’s heaven under the guidance of the same Liberal party that constructed the Canadian welfare state. The 2000 budget, prepared by Liberal finance minister Paul Martin, proposed a cut in the federal corporate-tax rate from 28 to 21 percent over the course of five years. According to Canada’s Department of Finance, Martin believed at the time that “if no action were taken, Canada’s general corporate tax rate would not be competitive with those of our trading partners.” The conservative government elected in 2006 and led by Stephen Harper finished the job, bringing the rate to its current level.
There is little chance that the Left in the U.S. will be so reasonable. But the sad fact is that Republicans have been terrible on this issue as well. President Bush and the Republicans controlled all the levers of government in the 2000s, and stood idly by as rates fell around the world.
Republicans made that choice because of the dirty little secret of corporate-tax reform: Most U.S. corporations are not excited about it. The reason is simple. The current code is actually pretty friendly to big firms, which can avoid American taxes by locating activity abroad. An American multinational pays the high U.S. tax on profits earned domestically, and on profits earned by its foreign subsidiaries that are repatriated to the U.S. But if a firm earns money in Ireland, that money will be subject to U.S. taxes only when the company transfers it back to America.
So what do firms do? Naturally, they locate as much activity as they can in low-tax countries, use every legal trick in the book to make overseas subsidiaries receive as much of their profits as possible, and then leave the money sitting in foreign bank accounts.
These efforts are so successful that U.S. firms, on average, are paying about a 17 percent tax rate on their foreign earnings. This rate is available to any firm that has highly mobile production. The only big losers are traditional manufacturers such as Boeing, which are stuck with high-taxed big facilities here in the U.S., and American workers, who watch as workers in low-tax countries get all the new jobs.
Thus, a Republican who offers to reduce the U.S. rate to, say, 25 percent is offering something that has very little value to most corporations. They are already getting a better deal abroad. And those with big overseas profits will be especially wary of reform, since a couple of closed loopholes could easily wipe out the benefits of the lower rate. That doesn’t mean we shouldn’t make incremental changes. At the margin, American firms will likely choose to locate more activity in the U.S. if the rate is lower. Benefits to American workers have been predicted in a number of recent studies, such as a 2007 paper by Alison Felix; work done by Mihir A. Desai, C. Fritz Foley, and James R. Hines; and my own research with Aparna Mathur. All the studies conclude that labor bears much, if not all, of the burden of the corporate tax. It is counterintuitive, but a lower rate would therefore benefit workers more than corporations. Workers and their liberal allies around the world seem to have figured this out. But here in the States, they haven’t.
So there we have it. Corporations will give only two cheers for Republican attempts to reduce the rate. Workers, who would reap most of the benefits of the reform, are under the allure of Obama’s economically illiterate propaganda. Corporate-tax reform will happen in the U.S. if the corporate sector patriotically embraces it, even though the direct pecuniary benefits to individual corporations are small, uncertain, and eventually diffused into higher wages. It will also happen if the American Left produces a leader who is at least as reasonable as the average Canadian Liberal.
In other words, don’t bet on it.