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Saturday, October 28, 2017

Foreigners Would Receives $700 Billion (35%) Of Trump's Proposed $2 Trilllion Corporate Tax Cut

Steven M. Rosenthal (Tax Policy Center), Slashing Corporate Taxes: Foreign Investors Are Surprise Winners, 157 Tax Notes 559 (Oct. 23, 2017):

The Unified Framework for Fixing Our Broken Tax Code (the “Big Six” tax plan) would revise business and individual taxes. Most significantly, on the business side, the Big Six tax plan would lower the corporate income tax rate from 35 percent to 20 percent, which would reduce corporate taxes by an average of $200 billion a year, or $2 trillion over the 10-year budget window. However, in the short run, a surprisingly large portion of this relief would end up in the pockets of foreign investors.

There is considerable debate among economists about the long-run incidence of a corporate income tax. Most mainstream economists believe that in the long run a corporate tax cut would benefit all owners of capital and, to a lesser degree, U.S. workers. At the extreme end of the spectrum, the Trump administration claims the pending plan to cut the corporate tax rate would increase wages for U.S. workers by $4,000 or more a year in the “long run.” It does not specify the time needed to reach the long run.

However, in the short run, everyone agrees: A cut in the corporate tax rate would benefit the current owners of U.S. corporate equity. I estimate that foreign investors own about 35 percent of U.S. corporate stock and thus would receive about 35 percent of the short-run benefit. This translates to approximately $70 billion a year, about three times the $23 billion that all middle-income households would see under the preliminary estimates of the Big Six tax plan. I also explain why the short run relief for foreign investors could persist for many years.

New York Times op-ed:  Trump’s $700 Billion Foreign Aid Program, by Paul Krugman (Princeton):

OK, this analysis from Steven M. Rosenthal at the Tax Policy Center is revelatory. It makes a simple point, but one everyone — myself included — somehow missed: the Trump tax plan is a huge giveaway to foreigners. Among other things, this means that the tax plan almost certainly reduces U.S. welfare even if you ignore distributional issues. This observation should transform discussion of the whole issue, at least among economists, although my cynical guess is that Republican-leaning academics will ignore it. ...

[U]nless a lot of tax-paying capital comes in, the overall effect will be to make the U.S. as a whole poorer — even ignoring the fact that we’re cutting taxes for wealthy investors and will have to offset by, say, taking health care away from the poor.

Is it harsh to call the Trump tax plan a $700 billion foreign aid program? Yes. But it’s also completely fair.

http://taxprof.typepad.com/taxprof_blog/2017/10/foreigners-would-receives-700-billion-35-of-trumps-proposed-2-trilllion-corporate-tax-cut.html

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Comments

The point of the article is unclear. Since 35% (an estimate or wild ass guess) of the tax burden is paid by foreigners, should we raise the corporate income tax. Or is it just Goldilocks perfect now.

If Siemens US pays less tax (and in a territorial system) will there be an incentive to move more profits to the US? I represented foreign owned companies who avoided putting high profit activities in the US. Has that been figured into the calculation?

Finally, outside of academia and politics, every tax practitioner thinks of the US rate as approximating 40% due to the effects of state corporate taxes net of deduction. (Or 14.3% more if you are counting.) To my recollection, only Canada, Japan and Switzerland have state analogues, and their taxes are not easily comparable to US states.

Posted by: aircav65 | Oct 29, 2017 8:59:15 AM

Quote: "[U]nless a lot of tax-paying capital comes in, the overall effect will be to make the U.S. as a whole poorer..."

Isn't this going to be accompanied by a requirement that all this money come back in and be invested in this country? Otherwise, I fail to see the point of this cut. If it isn't going to bring jobs back home, let it sit overseas facing potential taxation.

Posted by: Michael W. Perry | Oct 29, 2017 4:45:26 PM

Seeing how the "paygo plan" to pay for corporate tax cuts is to blow up 401(k) plans, I can see the campaign optics now, "Congressman Blowhard voted to cut the taxes of furrin companies and made you pay for it."

Posted by: Dale Spradling | Oct 30, 2017 6:48:56 AM