The Trump Administration and congressional Republican leaders (the Big Six) have proposed a $70 billion-a-year tax cut for foreign investors. It stems from the cut in statutory corporate income tax rate from 35 percent to 20 percent (and repeal of the corporate AMT), which would reduce corporate taxes by an average of $200 billion a year, or $2 trillion over 10 years. While economists debate who gains from corporate tax cuts over the long run, they generally agree that owners of U.S. corporate stock would reap the short-term benefits.
In a new article, I look closely at who holds outstanding U.S. corporate stock—and calculate foreigners now own about 35 percent. So, in the short run, foreigners would reap about 35 percent of the benefits of the cut in corporate taxes, which translates to around $70 billion a year.
What about the long run? As my colleague, Howard Gleckman, described last week, there are four conditions that must be met for the corporate tax cut to increase wages: U.S. corporate tax rates must attract lots of new investment capital. Corporations must use the money to purchase a lot of new equipment for their U.S. businesses. All that new investment must make U.S. workers much more productive. And, finally, that productivity growth must translate into far higher wages.
Indeed, the length of the short run may be stretched further if, as Paul Krugman observes, attracting lots of capital to the U.S. means very big trade deficits, leading to a stronger dollar, which would itself discourage capital inflows from abroad that would finance new investments.
Importantly, in the short run the Big Six is proposing to cut taxes for investments that have already been made, providing a windfall to existing investors, including foreign shareholders. Ideally, policymakers would cut taxes only for new investments, because those are the only ones that are sensitive to tax incentives. But that's not what slashing the corporate income tax rate would do.
The recently passed Senate Budget Resolution would allow Congress to borrow $1.5 trillion to pay for coming tax cuts. Future generations of U.S. taxpayers will bear the burden of that shortfall, which could prove especially onerous on top of the $10 trillion of deficits CBO projects under current law.
In my view, we ought to limit the benefits to foreigners from U.S. corporate tax reform. My paper offers a couple of suggestions, but they are difficult politically. Congress could keep the 35 percent corporate tax rate but adopt full corporate tax integration, with a deduction for dividends paid to shareholders as advocated by Senate Finance Committee Chair Orrin G. Hatch (R-UT). To prevent enriching foreign investors, Congress must require corporations to withhold taxes on those dividends, with a nonrefundable tax credit to the shareholders. Alternatively, Congress could lower the corporate tax rate but offset the cost by broadening the corporate income tax base. The Big Six identifies a couple of base broadeners, and suggests Congress should tackle others.
Unfortunately, promising big corporate tax cuts, with large windfalls for foreigners, is a lot easier than enacting real tax reform. But unless Congress changes the Big Six plan, Americans will pay a big price for a corporate tax cut—much of which would be a windfall for foreign investors.
