As of today, the proposals of congressional Republicans to revise the tax code still have several steps to go before final enactment. The House and Senate versions of the bill have some substantial differences, summarized here. The news has been full of information on the various proposed provisions. You would think that this would be the good time for a serious national debate about what makes for good tax policy. You would be wrong.
Among some dozens of tweaks to the tax code in the new bills, a big one stands out: the reduction in the top tax rate on corporate income from 35% to 20%. That reduction is in both the House and Senate versions of the bill. Somehow the Republicans have the idea that such a reduction will make investing in the United States more attractive and lead to the creation of jobs and to increased economic activity. Is there anything to that idea?
Well, there is quite a bit of experience from other countries. I won't try to do a comprehensive review, but consider the case of Ireland. Ireland led the way among countries with big reductions in its corporate tax rate in the 1990s, thinking that that could lead to a surge of economic growth. If you are as old as I am, you will remember Ireland as a relatively poor country. In 1970, Ireland's GDP per capita was about half that of the U.S.: $12,000 of Ireland v. about $24,000 for the U.S. Starting about 1995, Ireland began dramatic cuts in its corporate tax rate, which went from 40% in 1995 all the way down to 12.5% in 2002, where it remains today. How did that work out? Today, the GDP of Ireland equals or exceeds that of the U.S., depending on what measure you look to. The St. Louis Fed has a figure for U.S. per capita GDP as of 3Q 2017 as $52,685. At Trading Economics they have a figure for Ireland for 2015 of $65, 249. Whoa! You are hard pressed to find any remaining pockets of poverty in Ireland today.
Is Ireland's current prosperity entirely attributable to its aggressive reductions in its corporate tax rate? Certainly not. There are way too many moving parts in economic policy to ever be able to attribute good or bad results to just one facet of policy. Also, Ireland's economy had begun rapid growth before its big cuts in the corporate tax rate. Perhaps its joining the EU in 1973 made a big contribution to its success, or maybe improvements in its education system. But there is substantial anecdotal evidence that Ireland's low corporate tax rate has induced many corporations to locate there and grow there. The prosperity has lifted the whole country, not just a wealthy few. U.S companies that have chosen Ireland as a main base for their European or international operations include Google, Facebook, and Apple, as well as many large pharmaceutical companies. I don't think this is a coincidence. From Tim Worstall in Forbes, December 2015:
Ireland must actually be getting something right in its economic policy. And that thing they're getting right is exactly what we should all be doing too. Low tax rates on capital and corporate income, make up the revenue differences through higher taxation of consumption. No, not because we just want to stick it to the people and not the plutocrats, but because that's the efficient way to model a tax system. That efficiency being obvious in the manner that it produces these startling growth rates.
Anyway, based on the experience of Ireland and other countries, the idea that lowering corporate tax rates can improve economic growth and prosperity for everyone is certainly not a fringe position. Is there a good argument to the contrary? Possibly, but not one that you can get from the current debate going on in the United States. Tyler O'Neil at PJ Media on December 2 has compiled a roundup of arguments from the progressive side opposing the Republican tax reform. A few samples:
- Kurt Eichenwald of Newsweek and Vanity Fair in a December 2 tweet: "America died tonight. Economic suicide adopted to feed the insatiable greed of donors, who have been refusing to dole out $ to GOP until they got their tax cuts. Voters fooled by propaganda and tribal hatred."
- Comedian and actor Patton Oswalt in a December 2 tweet: "Is there any going back after this Tax Bill Scam? To America? Does it matter now if Trump is impeached? There's no America now. Not the one we knew. Sorry, feeling real despair this morning."
- Economic analyst Bruce Bartlett (who actually worked in the Treasury in the George H.W. Bush administration) on MSNBC on December 2: "It really defies comprehension. . . . Maybe they think that the poor have it so easy that they need to have to pay more taxes to force them to go out and work more. . . . It's really akin to rape."
- Liberal blogger Bill Palmer: "Millions of Americans died tonight. . . . So did the careers of every one of these psychotic drooling animals in the Republican Party who voted for it. This was mass murder."
And don't forget the evergreen Paul Krugman (not included in O'Neil's roundup), from November 27, "The Biggest Tax Scam in History": "The bill Republican leaders are trying to ram through this week without hearings, without time for even a basic analysis of its likely economic impact, is the biggest tax scam in history. It’s such a big scam that it’s not even clear who’s being scammed — middle-class taxpayers, people who care about budget deficits, or both."
Meanwhile, there's no doubt what the U.S. financial markets think about this prospective tax reform. The stock market has been on a tear, interrupted with brief sharp declines each time the tax bills have seemed to stumble. There's nothing terribly complicated about this. A dollar of earnings remaining after a 35% tax bite suddenly becomes $1.23 when the tax bite is reduced to 20%. Of course the stock market should go up 20% or so. Raising capital for a business has just become dramatically cheaper.
We're about to get a real world test of who's got the better of economic policy. I'm betting on an excellent 2018 for the U.S. economy.