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Tax cut offers long lasting economic benefits
Companies keep more of each dollar of taxable income earned, inducing investment: Opposing view
Critics of the new tax law see the recent surge in stock buybacks as proof that the law is failing to boost the economy. Their argument is flawed. But it’s an understandable response to flawed arguments made by the law’s supporters about the effects of bringing foreign profits home. The real benefits of the corporate tax rate cut are getting lost in the confusion.
The tax law’s repatriation provision is encouraging foreign subsidiaries, which hold $2 trillion of accumulated overseas profits, to return much of that money to their U.S. parent companies. Some of the law’s supporters claimed that the parent companies would use this money to invest at home. Economists (including this author) have steadfastly rejected such claims.
A self-interested company’s investment decisions are based on the profitability of potential investments. Moving money from subsidiaries’ bank accounts to parent companies’ bank accounts doesn’t make potential investments more profitable. The repatriated profits are being used for stock buybacks, just as they were during a 2004 repatriation holiday.
OUR VIEW:Corporate America invites a backlash
Fortunately, the tax law’s cut in the corporate tax rate from 35% to 21% does make potential U.S. investments more profitable. The rate cut lets companies keep more of each dollar of taxable income they earn here, inducing self-interested companies to invest more.
Although the gradual capital buildup spurred by the corporate rate cut is less exciting than an imagined investment splurge from a massive one-time cash inflow, it offers long lasting economic benefits. Additional capital in the United States makes workers more productive and therefore more valuable to employers. As employers bid against each other to attract workers, they are forced to pay higher wages.
The law’s critics should stop talking about the irrelevant stock buybacks, and its supporters should stop talking about the irrelevant employee bonuses. We should all start talking about the investment incentives offered by the corporate tax rate cut.
Alan D. Viard is a resident scholar at the American Enterprise Institute.
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