BY JAMES P. PINKERTON
This Op-Ed originally appeared in RealClearMarkets.
After three national debates—two presidential, one vice-presidential—in 2020, the divergence between the parties’ agendas on taxation is clear. That is, Donald Trump and Mike Pence want to maintain a pro-competitive tax policy for the U.S., while Joe Biden and Kamala Harris want to change that policy. To put the matter another way, the challengers wish to change tax policy in ways that would make America less competitive among the world’s nations.
For the most part, the debates generally confirmed the economic platforms already put forth by the rival campaigns. Trump and Pence count the 2017 Tax Cuts and Jobs Act (TCJA) as their signature economic achievement; most consequentially, TCJA cut the corporate tax rate from 35 percent—at the time, the highest rate in the developed world—down to 21 percent. (TCJA also cut taxes for individuals.)
In the wake of the TCJA, the stock market rose to an all-time high, and the unemployment rate fell to a half-century low. Yet we can observe, with sadness, that some of this economic progress was disrupted by the Covid-19 pandemic, and yet the current weakness of the economy should put a spotlight on the need not only to find a vaccine for the virus, but the right tonic for the economy as well.
Indeed, the need to revive the economy ASAP puts the Biden-Harris economic agenda in a particularly unflattering light. How so? Because a key element of their plan is a dramatic alteration of TCJA, by raising the corporate tax rate to 28 percent.
So President Trump was right to raise the risks of the Biden-Harris tax-hike proposal in the September 29 debate. Specifically, he made a telling point about some of the harm that could come from undoing TCJA: “Half of the companies that have poured in here will leave. And plenty of companies that are already here, they’ll leave for other places.”
Here, the president was referring to the phenomenon of corporate tax inversions. This phrase might seem unfamiliar today, for the simple reason that inversions are barely happening anymore. Yet just a few years ago, prior to the passage of TCJA, they were a frequent occurrence. That is, a long list of American companies—including such prominent firms as Burger King, Johnson Controls, and Medtronic—were de-incorporating themselves in the U.S. and re-incorporating themselves in lower-tax jurisdictions, most notably, Ireland. This inversion process was perfectly legal, albeit distasteful, as well as potentially harmful to U.S. economic security and national sovereignty.
So that’s why the vast majority of American companies had no interest in inverting; what they wanted, instead, was for the U.S. to have a corporate tax rate that would let them be good corporate citizens, while still maintaining their economic effectiveness in the global marketplace.
Indeed, we should pause over the hard reality of this global marketplace, and what it means for corporate survival. If U.S. corporations are taxed at a higher rate than competitors, it’s easy to see the logic of a foreign firm snapping up an American firm; after all, if the lower-taxed foreign company takes over a higher-taxed American company, the foreign company will enjoy an immediate cash windfall just by changing the “flag” on the company’s tax return—and paying the lower foreign rate on the ex-American firm’s earnings.
Interestingly, in the middle of the last decade, prior to TCJA, concern over inversions was thoroughly bipartisan. As Bloomberg News reported in March 2017, “U.S. lawmakers in both parties dislike inversions and many also acknowledge that only a major corporate tax overhaul is likely to stop them.”
Such a needed overhaul was precisely the goal of TCJA, signed into law in December 2017. TCJA brought the U.S. corporate tax rate down to 21 percent, slightly below the international international average as measured by the Organization of Economic Cooperation and Development, the 37-member “club” of most-developed nations.
Moreover, the U.S. now boasts a corporate tax rate four points lower than that of the largest non-member of the OECD, the People’s Republic of China. We might dwell on the point that it’s impossible to think of any scenario under which the U.S. would gain by becoming less competitive than our principal economic and strategic rival.
As Washington, D.C., tax expert Ryan Ellis said of corporate tax inversions to Forbes magazine, “Since we brought our rate down closer to the middle of the pack, inversions have all but disappeared. If our corporate income tax rate rises as significantly as Biden-Harris wants, we can expect inversions to once again tick up.”
So this is a key choice the voters face this year: Should we stay on the path of corporate competitiveness—with all the benefits that such competitiveness brings to workers, investors, and all Americans? Or should we return to the bad old days of slower growth and the dismal spectacle of America’s crown-jewel corporations being plucked and harvested by foreign competitors?
James P. Pinkerton, a veteran of the White House domestic policy offices of Presidents Ronald Reagan and George H.W. Bush, is the co-chair of the RATE Coalition.