So, we’re really going to do this, huh? President Trump gave a speech about tax reform on Wednesday, and it appears we’re now going to be subject to a kabuki debate between Democrats and Republicans about whether to cut the corporate income tax rate. Really? After eight years of Democrats from President Obama on down recognizing the high U.S. rate puts American companies at a competitive disadvantage and gives them a reason to make otherwise unmerited mergers with foreign companies and move their headquarters overseas? All for no reason other than the fact a Democrat is no longer in the White House?
It looks that way. For now Democrats are couching their opposition to GOP plans as blocking cuts for “the wealthiest.” But elsewhere, such as in the “Better Deal” Senate Democrats are hawking as their own warmed-over brand of populism, they sound like they’re backing away from the talk about corporate tax rates harming companies’ competitiveness. And it’s worth noting that their base, and some of their loudest cheerleaders, don’t see a distinction between cuts for the highest-earning individuals and cuts for companies. They’re all “the rich,” and they all need to pay their “fair share.”
Yes, it’s something of a time-honored — if honored by no one else — tradition for the minority party to suddenly take a stand against something it previously supported, just to please its base. And there has always been disagreement between the parties about how far to go in lowering corporate tax rates. But it tells us something about the Democratic base and its priorities that it would choose to take up this particular fight.
The left has been howling about “record” corporate profits, as if they are somehow a bad thing, for years now. The main implication appears to be that companies could choose to pay their workers more, but aren’t, and therefore need to be taxed as penance. Or something. They seem to ignore that for much of the past decade there has been a great deal of slack in the labor market due to higher-than-usual unemployment; and that slack remains in the labor market due to the abnormally low (by historical standards) labor-force participation by prime-age men in particular; and that much of the job growth during this time came in low-wage industries such as food service that are more likely to eliminate jobs through automation than to dramatically increase pay, whatever the Fight for $15 people choose to believe. Taken together, those factors are far better explanations for slow wage growth than corporate greed. So is the rising cost of non-cash compensation, such as health insurance, that has simply consumed much of the growth of what could have gone into paychecks.
They also ignore a big element of our corporate landscape that undermines both the notion that companies are making plenty of money already, as well as the subsequent argument against corporate tax reform.
First, let’s acknowledge that profits aren’t the same thing as profit margins. Some very large companies bring in a lot of revenue and a lot of profit, but their profit margins aren’t exactly fat (health insurers and retailers come to mind, despite the popular conception of those sectors). Nor have most of the measures I’ve seen for corporate profits been adjusted for inflation, corporate revenues, the size of the economy, or growth in population/the work force. It’s a bit like comparing the nominal amount of taxes levied in 1950 vs. those today without adjusting for such factors; no one does that, unless they’re trying to draw a distorted picture.
Second, while corporate profits in the aggregate are healthy, the story isn’t the same for all companies. A USA Today analysis last year of 2015 profits found just 6 percent of companies listed in the S&P 500 accounted for over half of its net profits. Now, some of these are just huge companies. But they don’t represent half of the index’s revenues; it’s more like one-quarter. That suggests there are some companies doing extremely well while some others are struggling. Now, it’s not the government’s job to make the latter group more profitable — but then, that shouldn’t be the intent of corporate tax reform. The intent of reform should be to make them more competitive, compared to peers in other countries; whether they parlay that into greater profitability is up to them. In any case, if most of these “record” profits are being generated by a relative handful of companies, that isn’t an argument for keeping tax rates high on all companies — or even raising corporate taxes, as Sen. Elizabeth Warren has suggested.
Third, while the companies among that 6 percent pay varying tax rates, some of them are the very ones that benefit most from the current, loophole-ridden system — while other companies suffer from that same system. While the Congressional Budget Office reported earlier this year that the average corporate tax rate paid is closer to 29 percent than the statutory rate of 39.1 percent (federal and state combined), a number of companies pay less than that. Some of them are among that 6 percent, particularly our tech titans: Apple, Microsoft, Google. One goal of reform should be to level the playing field — not by raising those companies’ taxes, but by lowering the burden on the others. And while we’re talking about tech companies, let’s acknowledge that their disproportionate representation among our most profitable companies isn’t guaranteed to continue. Apple, for example, accounted for almost $54 billion, or nearly 7 percent of the S&P 500’s profits, on its own. That degree of profitability almost certainly won’t last forever, and it’s ludicrous to use it as an argument against reform that would benefit other companies, including the ones that may help produce the next big round of economic growth.
Finally, it’s important to remember that when we talk about reform, we’re talking about improving the incentives for companies at the margin. The CBO found that while the marginal effective tax rate — that is, what a company could expect to pay in taxes on “an investment that pays just enough to make the investment worthwhile” — is still lower at 18.6 percent, it remains higher than most of our competitors around the world. In particular, it’s higher than the rate found in some other industrialized countries with which we compete, such as Germany (15.5 percent), France (11.2 percent), Australia (10.4 percent) and Canada (8.5 percent), that are generally perceived as higher-tax nations with the kind of social-welfare programs the opponents of corporate tax reform would like to see in our country. It’s also higher than the lower-tax, developing nations to which some U.S. jobs have gone over the past few decades: Mexico (11.9 percent), China (10 percent) and South Korea* (4.1 percent).
Reform is about changing the incentives for those investments, not to say even more promising ones, so that they’re made in our country rather than elsewhere. Reform opponents have yet to explain why that was a concern when Obama was president, but suddenly isn’t anymore.
*Arguably, South Korea should be considered a developed country rather than a developing one, but it doesn’t really fit in the higher-tax, more-welfare group like the others.