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Off Course: Critiquing the Debate About the Corporate Tax Cut rights reserved. by Alan D. Viard investment and wages. Unfortunately, the public

Alan D. Viard is a Tax resident scholar at the debate about the tax cut has largely ignored the American Enterprise relevant incentive effects. Analysts Institute. He thanks Supporters of the corporate tax cut took a Alex Brill, Cody Kallen, wrong turn by publicly accepting some Erin Melly, and Jason companies’ claims that the one-time employee does Saving for helpful bonuses they paid in late 2017 and early 2018 were not comments. due to the tax cut. Because the tax cut could not claim In this article, Viard have raised the market level of wages that quickly, companies’ attribution of the bonuses to the tax argues that the public copyright debate about the cut appears to have been a public relations corporate tax gimmick. By latching onto the one-time bonuses, provisions of the Tax supporters drew attention away from the slower- in

Cuts and Jobs Act has acting incentive effects featured in the economic any ignored the relevant incentive effects, amid theory. public discussions of one-time employee bonuses and Opponents correctly argue that corporations the lack of corporate altruism. He urges that the

will not altruistically share their tax savings with domain debate be refocused on the real advantages and disadvantages of the corporate tax cut, workers and will not increase investment out of a particularly the improved investment sense of social responsibility. However, they fail to incentives, the worsening of the long-term fiscal recognize that the economic theory does not rely or third imbalance, and a likely increase in inequality. on those motivations. Little attention has been

paid to the incentive effects of the corporate tax party The views expressed in this article are solely rate reduction and expensing. Opponents the author’s. mistakenly cite the wave of stock repurchases as content. Copyright 2018 Alan D. Viard. evidence that the rate reduction was ineffective, All rights reserved. although the repurchases are the expected response to the allowance of tax-free repatriation The Tax Cuts and Jobs Act (P.L. 115-97) and actually shed little or no light on the effects of reduced the corporate tax rate, expanded the corporate tax rate reduction and expensing. expensing, and allowed tax-free repatriation of The debate should be refocused on the real some foreign subsidiaries’ earnings. Stylized advantages and disadvantages of the corporate economic theory lays out a clear-cut channel tax cut, which has the potential to boost long-run through which corporate tax rate reduction and growth but is likely to worsen the long-term fiscal expensing induce self-interested corporations to imbalance and increase economic inequality. invest more in the United States, thereby Attention should be focused on that fundamental enlarging the capital stock, which makes workers trade-off. more productive. Wages are gradually forced up as self-interested employers bid against each other I. Stylized Economic Theory to hire more workers. The stylized theory also predicts that tax-free repatriation of foreign Stylized economic theory, which assumes that subsidiaries’ earnings does not affect U.S. corporations seek to maximize after-tax profits in a smoothly functioning economy, make clear-cut

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predictions about the qualitative effects of a hire more workers at the going wage. Employers’ Tax

corporate tax rate reduction, expanded competition to hire more workers bids up wages, Analysts. expensing, and tax-free repatriation of foreign forcing employers to pay more to obtain workers subsidiaries’ earnings to U.S. parent companies. and drawing new entrants into the workforce.

The description below draws on my earlier article The wage increases and additional hiring occur All

about the economic effects of the corporate tax gradually while the capital stock expands. rights rate reduction.1 Although the levels of output and wages permanently rise, their growth rates do not reserved. A. Corporate Tax Rate Reduction and Expensing permanently increase. Section 13001 of the TCJA amended section 11 Some of the new investment may be financed to permanently reduce the corporate tax rate from by foreign savers. The increased inflow of funds Tax

a graduated schedule with a top rate of 35 percent from abroad is accompanied by an increase in the Analysts to a flat 21 percent rate, effective on January 1, trade deficit. The increase in Americans’ future 2018. Section 13201 of the TCJA amended section incomes is smaller than the increase in the future 168(k) to temporarily allow full expensing of output produced within the United States because does investments in some types of business property, part of the additional output must be paid to the not generally effective for property placed in service foreign savers who helped finance the additional from September 28, 2017, to December 31, 2022.2 investment. claim Although the larger capital stock and higher

A corporate tax rate reduction raises the after- copyright tax profitability of making U.S. investments in wages produce a positive long-term revenue any type of business property that receives capital feedback, the feedback does not fully offset the direct revenue loss from the rate reduction and

cost recovery allowances less generous than in 4

expensing. Allowing investments to be expensed expensing. The corporate tax cut therefore causes any a decline in federal revenue; in colloquial terms,

rather than depreciated similarly boosts the after- public tax profitability of making U.S. investments.3 The the tax cut does not pay for itself. The revenue decline must eventually be offset by tax increases

rate reduction and expanded expensing therefore domain prompt self-interested corporations to invest or spending cuts of the same present discounted more in the United States. The rate reduction is value. likely to be more important than the expansion of If the tax increases or spending cuts are not or expensing because the expensing provision is adopted contemporaneously with the corporate third

temporary and excludes some types of business tax cut (as they were not for the TCJA), the party property. resulting increase in the federal debt may drive up The resulting expansion of the U.S. capital interest rates. The increase in interest rates crowds content. stock makes U.S. workers more productive, out investment, offsetting at least part of the prompting self-interested corporations to seek to investment boost. B. Effects of Tax-Free Repatriation

1 Alan D. Viard, “Economic Effects of the Corporate Tax Rate Section 14101 of the TCJA enacted new section Reduction,” Tax Notes, Mar. 5, 2018, p. 1393. 2 245A, which permanently exempts U.S. Partial expensing is allowed for property placed in service in 2023 through 2026. Section 13101 of the TCJA also permanently expanded corporations from tax on repatriation of the expensing for small businesses. earnings of some foreign subsidiaries, effective 3 The expensing provision’s effect on investment location is clear-cut January 1, 2018. Although U.S. parent companies because, under section 168(k)(2)(D)(i) and (g)(1)(A), expensing does not apply to property used predominantly outside the United States. The corporate tax rate reduction’s impact on investment location is clear-cut for foreign corporations because, under sections 881 and 882, such corporations are subject to U.S. tax only on income effectively connected with a U.S. trade or business and U.S.-source income. For foreign corporations, the U.S. corporate income tax is therefore a tax only on U.S. investment and reducing the tax rate makes U.S. investments more profitable relative to foreign investments. For U.S. corporations, the rate reduction increases the profitability of U.S. investment relative to foreign

investment if the corporations’ U.S. investments are taxed more heavily 4 than their foreign investments, as was true under prior law and is true A full revenue offset is theoretically possible but would only occur under the TCJA. under extreme conditions that do not now apply to the United States.

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pay U.S. tax on some earnings of their foreign Share repurchases or other distributions to Tax 5 subsidiaries, the tax is generally imposed when shareholders of funds previously held in foreign Analysts. the earnings occur (or at some other fixed date) subsidiaries’ bank accounts do not change the and the earnings can be repatriated without amount of funds available for investment. The additional tax liability. distributions do not remove funds from the All

Repatriation involves a dividend payment capital markets because the shareholders can rights from a foreign subsidiary to its U.S. parent invest the funds that they receive, and they do not company, typically implemented by transferring inject new funds into the capital markets because reserved. money from the subsidiary’s bank account to the the funds held in the subsidiaries’ bank accounts parent company’s bank account. Both accounts were lent in the capital markets. may well be at U.S. banks,6 which makes clear that Tax C. Key Features of Stylized Theory it is generally inaccurate to describe repatriation Analysts as money coming back to the United States after Four features of the stylized economic theory having been trapped offshore. are important for understanding how the public According to the stylized economic theory, the debate has gone off course. does transfer of funds from subsidiaries’ bank accounts

First, the investment effects arise from not to parent companies’ bank accounts does not anticipated tax savings on future investments, not claim change the after-tax profitability of U.S. from an increase in cash flow or tax savings on investments and therefore does not change the

past investments. Corporations do not use their copyright investment decisions of self-interested tax savings to make additional investments; corporations. Because the capital stock is instead, they make additional investments to unchanged, there is no impact on labor

obtain larger future tax savings. The investment in productivity, wages, and hiring. Although the increase therefore comes from the tax reduction any repatriated funds could remain in the parent

on new investments rather than windfall tax public company’s bank account, they are likely to instead savings on investments made before the TCJA. be distributed to shareholders through dividends

The windfall tax savings on old investments are domain or share repurchases or to lenders through debt distributed to shareholders in the same manner as reduction. repatriated foreign subsidiary earnings. As a side Under the stylized economic theory, the note, having instead phased in the corporate tax or repatriation of funds from the subsidiary to the rate reduction over several years, as my AEI third 7 parent does not increase the wealth of the parent colleague Alex Brill and I recommended, would party company’s shareholders because those have preserved most of the incentives for new shareholders are the ultimate owners of both the investments while limiting the windfall tax content. parent and the subsidiary. Similarly, the parent’s savings for old investments. distribution of the funds to its shareholders, Second, the wage and hiring effects arise from perhaps through share repurchases, does not the higher labor productivity induced by the increase the shareholder’s wealth, because the expansion of the capital stock. Corporations do funds already belonged to them. Shareholder not use their tax savings to hire more workers or wealth is increased by the removal of the pay higher wages. Instead, they seek to hire more repatriation tax, as it would be by any other tax workers because workers are more productive. cut, but it is not increased by the repatriation They pay higher wages because that is the only itself. way they can attract workers that other corporations are also seeking to hire in increased

5 Section 14201 of the TCJA enacted new section 951A, which taxes 7 U.S. parent companies on global intangible low-taxed income and Brill and Viard, “Corporate Rate Cut: A Gradual Phase-In Would Be sections 951 through 956 continue to tax U.S. parent companies on Best,” AEIdeas blog (Nov. 28, 2017). In the stylized economic theory, the subpart F income. Section 14103 of the TCJA amended section 965 to same logic supports the use of expensing, which is limited to new place a one-time tax on foreign subsidiaries’ past unrepatriated earnings. 6 investments, rather than corporate tax rate reduction. A countervailing Under section 956(c)(2)(A), U.S. parent companies are not taxed on factor in the actual economy is the possibility that corporations’ attention foreign subsidiaries’ deposits in U.S. banks, although they are taxed on to financial accounting may blunt the power of expensing, as discussed many other types of foreign subsidiaries’ investment in U.S. property. below.

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numbers. Even employers who do not receive the theory to reflect a role for financial accounting Tax

corporate tax cut, such as nonprofit organizations therefore diminishes the investment boost from Analysts. and passthrough businesses, are forced to pay expensing. However, that modification amplifies higher wages as they compete with corporations the investment boost from corporate tax rate

to attract workers. reduction because the rate reduction can provide All

Third, although the investment effects may a boost to expensed investments as well as those rights start relatively quickly, they are likely to occur for which cost recovery is less generous than over an extended period. The wage and hiring expensing. reserved. effects occur over many years, as the capital stock If capital markets are imperfect, corporations is gradually enlarged by the new investments. can base their investment decisions partly on cash Fourth, none of the effects arise from any flow rather than the profitability of new Tax

generosity, altruism, or sense of social investments. In that case, tax-free repatriation Analysts responsibility by corporations. The stylized may have modest real economic benefits by economic theory assumes that corporations giving corporations greater flexibility in the

single-mindedly maximize after-tax profits, both financing of their investments. By making does before and after the corporate tax cut. investment financing less costly, tax-free not The stylized economic theory outlines repatriation may lead to a slight increase in important advantages of corporate tax rate investment. However, any investment effects are claim reduction and expensing, indicating that those likely to be small relative to the effects of rate copyright policies increase economic output and that reduction and expensing. workers receive a portion of the increased output. If the economy deviates from full Yet the theory also makes clear that a corporate employment, then a corporate tax cut may in

tax cut has important disadvantages, because it temporarily improve output by providing any reduces revenue, which may crowd out Keynesian demand stimulus. In the first few years public investment through deficit financing and which after a corporate tax cut, it may be difficult to forces other tax increases or spending cuts to distinguish the transitory Keynesian effects from domain eventually be adopted. The theory also leaves the initial manifestations of the longer-lasting important questions unanswered, including the benefits offered by the enlargement of the capital

magnitude and timing of the increases in stock. or investment and wages and the extent to which third E. Economists’ Arguments

deficit financing offsets those effects. Moreover, party the theory makes clear the lack of significant Economists broadly agree on the outlines of economic benefits from tax-free repatriation of the theory, with some of the modifications content. foreign subsidiaries’ earnings. discussed above, but they disagree about the magnitude of the relevant effects. As a recent Wall D. Modifications of Stylized Theory Street Journal article stated, “The long-run The stylized theory must be modified to fully economic case for the corporate tax cut was that describe economic reality. However, the necessary the rate reduction and incentives for business modifications do not change the basic investment would give companies more reasons conclusions. to invest in the United States, because projects that For example, some corporations may respond didn’t make financial sense would become to financial accounting measures of tax liability profitable. Over time, those investments would rather than to actual tax burdens.8 Because the increase worker productivity, accelerating financial accounting measures do not account for pressure on companies to pay them more. the time value of money, they fail to reflect the Economists across the political spectrum benefits of expensing. Modifying the stylized generally agree that such changes may happen,

8 For further discussion, see Lily L. Batchelder, “The Shaky Case for a Business Cash-Flow Tax Over a Business Income Tax,” 70(4) Nat’l Tax J. 901-935 (Dec. 2017).

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though they differ about the scale and pace of the Foundation study emphasized that a repatriation Tax 14 change and how broadly the benefits are holiday would offer little economic benefit. In an Analysts. distributed.”9 In an article surveying arguments August 2017 interview, I echoed the consensus for and against the corporate tax cut, Justin view of the profession by stating that

Wolfers of the University of Michigan “repatriation has little effect on real investment in All 15 commented, “A tax cut increases the incentive to the United States.” rights invest. . . . This incentive effect drives most As these statements indicate, economists economic models of investment, and few generally agree on the mechanism at work, but reserved. economists debate its underlying logic, although the relevant magnitudes are subject to there’s considerable debate about whether it will disagreement and uncertainty. As Alan J. 10 yield a large or small increase” in investment. Auerbach of the University of California-Berkeley Tax

The underlying consensus encompasses aptly commented, “There’s a pretty wide band of Analysts academic opponents of the corporate tax cut. A possible outcomes that are pretty plausible.”16 leading opponent, 2008 Nobel economics laureate The debate about the corporate tax cut could

Paul Krugman, acknowledges the validity of the have focused on an effort to clarify the relevant does standard economic theory while sharply magnitudes and a discussion of the tax cut’s questioning its practical importance. In a recent unfavorable fiscal implications. Unfortunately, not article harshly condemning the corporate tax cut, the debate has gone off course. Supporters of the claim Krugman said, “The theory is that lower tax cut deserve part of the blame. corporate taxes will draw in lots of money from copyright overseas, which corporations will invest in new II. Supporters Take a Wrong Turn plants and equipment, which will drive up the

Economists supporting the corporate tax rate in

demand for labor, which will raise wages. And to reduction and expensing have generally done so any be fair, there’s probably something to this theory

11 by appealing to economic theory. Council of public — something, but not very much.” In a more Economic Advisers Chair Kevin Hassett, a former recent article denouncing the tax cut, Krugman

AEI economist, explained that the corporate tax domain acknowledged that “there’s some reason to rate reduction would make the United States believe that lower tax rates will, other things “perhaps the all-in most attractive location for equal, have some positive effect on capital investment on Earth . . . that naturally would lead or formation,” but emphasized that “the effect to more capital formation, more wage growth, third should be fairly small” and that tax cuts are “fairly 17 12 and more economic growth.” Other economists party ineffective” at stimulating investment. have also correctly described the incentive effects. Economists across the ideological spectrum Professor Mihir A. Desai of Harvard Business content. also agree about the limited effects of repatriation. School comments, “A major rationale for the Empirical evidence confirms that the funds corporate reforms is to incentivize corporate repatriated during the 2004 holiday were largely 13 investment, prompting gains in productivity and, distributed to shareholders. A 2011 Heritage ultimately, greater wages for workers.”18 At least a few policymakers have also made the economic case for the corporate tax cut. House Speaker Paul

14 9 Curtis Dubay and J.D. Foster, “Would Another Repatriation Tax Akane Otani, Richard Rubin, and Theo Francis, “Buybacks Surge in Holiday Create Jobs?” Heritage Foundation Backgrounder 2610 (Aug. 3, Wake of Tax Cuts,” The Wall Street Journal, Mar. 2, 2018. 2011). 10 15 Wolfers, “How to Think About Corporate Tax Cuts,” The New York Quoted by Patricia Cohen, “Trump Has Big Tax Plans, but Evasion Times, Apr. 1, 2018. Eludes Limits,” The New York Times, Aug. 30, 2017, at B1. 11 16 Krugman, “Taxpayers, You’ve Been Scammed,” The New York Times, Quoted by Richard Rubin, “Who Ultimately Pays for Corporate Mar. 1, 2018. Taxes? The Answer May Color the Republican Overhaul,” The Wall Street 12 Journal, Aug. 8, 2017. Krugman, “Tax Cuts and Leprechauns,” The New York Times, June 17 15, 2018. Quoted by Jonathan Curry, “Hassett Rebuts ‘Not-So-Flattering’ Tax 13 Bill Analysis,” Tax Notes, Nov. 27, 2017, p. 1187, 1188. One leading study is Dhammika Dharmapala, C. Fritz Foley, and 18 Kristin Forbes, “Watch What I Do, Not What I Say: The Unintended Desai, “Tax Reform, Round One,” Harvard Magazine, May-June Consequences of the Homeland Investment Act,” 66 J. of Fin. 753 (2011). 2018.

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D. Ryan, R-Wis., said, “America will once again explanation even in those cases. Hassett has Tax

become the best place in the world to invest and reasonably estimated that the tax cut’s wage and Analysts. build a business. Jobs and capital will return from investment effects might take three to five years,23 overseas, leading to more demand for labor, a time frame that makes it unlikely that the tax cut 19 higher wages, and bigger paychecks.” would induce an increase in base wage rates All

Nevertheless, supporters of the corporate tax today. rights cut took a wrong turn when they reacted so Many observers, including this author,24 have enthusiastically to the one-time employee concluded that the bonuses were due to tight reserved. bonuses announced by hundreds of corporations labor markets and that companies attributed them soon after the TCJA was adopted. The companies to the corporate tax cut to win favor with the attributed the bonuses to the tax cut and public or with the president. Krugman noted that Tax

supporters seized on the bonuses to argue that the “companies had every incentive to pretend that Analysts tax cut was already increasing wages. Americans the tax cut was responsible, if only to curry favor for Tax Reform maintains a list of the 660 with the Trump administration.”25 Columnist

companies that as of July 12, 2018, have attributed Catherine Rampell of The Washington Post called does bonuses, wage increases, fringe benefit the bonuses “a PR stunt, puffing up pay increases improvements, or other “good news” to the tax that likely would have occurred anyway.”26 not cut.20 Corporations also had an incentive to accelerate claim As I noted in earlier articles, however, the one- bonuses to deduct the costs while the higher time bonuses cannot reflect the increased corporate tax rate was still in effect. copyright productivity and labor demand that the stylized Tying the case for the corporate tax cut to the economic theory envisions from the corporate tax employee bonuses was a misplaced strategy. For 21 in

rate reduction. The productivity boost from the one thing, the bonuses were small relative to the any expansion of the capital stock arises over a period aggregate economy. Americans for Tax Fairness of years, not in the first few months. The one-time estimates that 5.4 million workers, approximately public bonuses were disbursed to workers before the 4 percent of the workforce, received bonuses productivity increase could kick in while offering totaling $4.4 billion. The organization also domain workers nothing in the future years in which estimates that 2.1 million workers are receiving

productivity gains might be underway. wage increases with a total value of $2.6 billion in or 27 Hassett stated on February 2 that companies 2018. third

may be “getting out ahead of the wage increases More importantly, supporters’ willingness to party that they expect people are going to be offered.”22 assert that corporations had simply given part of

If corporations were doing that, however, they their tax savings to workers set the stage for an content. would increase their base wage rates rather than unilluminating debate. Opponents have doubled offering one-time bonuses. At best, Hassett’s down by setting up a straw man in which the explanation could be valid for the small number corporate tax cut is imagined operating in a of companies that increased their base wage rates. manner completely different from the stylized However, the timing casts doubt on the economic theory, but somewhat like supporters’ explanation of the bonuses. Opponents have handily rebutted that straw man while failing to

23 Quoted by David van den Berg, “Hassett Spars With Lawmakers Over Corporate Buybacks and Tax Law,” Tax Notes, Mar. 26, 2018, p. 19 1844. Ryan, “Tax Reform Means Your Paycheck Will Grow,” The Wall 24 Street Journal, Dec. 20, 2017. Viard, supra note 1, at 1405; Viard, “Tax Cut Supporters Should 20 Stop Talking About Corporate Bonuses,” supra note 21. John Katch, “List of Tax Reform Good News,” Americans for Tax 25 Reform (Aug. 2, 2018). Krugman, supra note 11. 21 26 Viard, supra note 1, at 1404-1405; Viard, “Tax Cut Supporters Rampell, “Two Republicans Told the Truth. Oops,” The Washington Should Stop Talking About Corporate Bonuses,” The Hill, Jan. 17, 2018. Post, May 4, 2018, at A19. 22 27 Curry, “Hassett Touts Bonuses as Early Signal of Tax Cuts Americans for Tax Fairness, “Key Facts: How Corporations Are Working,” Tax Notes, Feb. 12, 2018, p. 958. Spending Their Trump Tax Cuts.”

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For more Tax Notes content, please visit www.taxnotes.com. ON THE MARGIN © 2018 address the economic case for the corporate tax Opponents of the corporate tax cut have had Tax cut. no difficulty rebutting the straw man that they Analysts. constructed and demonstrating that corporations III. A Straw Man do not act in such an altruistic manner. By In opponents’ straw man framework, attacking that straw man, however, they have All corporations make investments out of a public- avoided addressing the economic case for the rights spirited desire to strengthen the national corporate tax cut. reserved. economy. The receipt of additional cash from tax IV. Debate Goes Off Course savings or foreign subsidiaries’ dividend payments offers corporations additional To fully grasp the extent to which the debate opportunities to fulfill their patriotic investment has gone off course, it is useful to survey some of Tax mission. Corporations therefore use some of the the most common arguments. I divide the Analysts cash to make additional investments, regardless arguments into seven categories, recognizing that of whether those investments are profitable. the categories overlap to some extent. In the straw man framework, wages are a gift does A. Tracking the Tax Savings

that altruistic employers bestow on workers. The not receipt of additional cash from tax savings or from

The most pervasive and overarching problem claim foreign subsidiaries’ dividend payments offers has been a focus on the use of the tax savings, with corporations additional opportunities to indulge little attention to incentives. As Wolfers noted, copyright their generosity, prompting them to share the cash “The early debate about whether the tax cut is with workers. Corporations make new gifts in the working has barely focused on the incentive form of higher wages, with no regard for whether effects, tracking instead what companies are in the workers produce enough output to cover the doing with their cash windfalls.”28 any costs. The wage increases occur immediately; One article stated that “the early moves are public gripped by altruistic zeal, corporations brook no spurring a political debate about how companies delay in their noble endeavor. are using the savings from the tax cut; the full domain Although my description may appear to be a answer won’t be fully understood for months or caricature of the theory that opponents of the years as the new money moves through the corporate tax cut have focused on rebutting, a 29 or

economy.” A Vox article complains that third review of opponents’ terminology suggests that it “companies have been eager to put the savings is not too far from the mark. As detailed below, they’ve reaped from the new law into their party some opponents have complained that shareholders’ pockets.”30 Senate Minority Leader corporations have not used their tax savings to Chuck Schumer, D-N.Y., lamented that content. make investments, hire more workers, raise “companies across the country are stuffing the wages, or lower their prices. They have called for savings from the Republican tax bill into their the tax savings to be “reserved” for wage own pockets and the pockets of their wealthy increases rather than “diverted” to other uses. investors, rather than workers.”31 In a May 8, 2018, They have complained that the “sharing” of the press release, Sen. Sherrod Brown, D-Ohio, said, tax savings has been insufficiently “generous” and have condemned corporations as “cheapskates” who have “withheld the wealth” from workers. They have demanded that corporations account for the use of their tax savings to government agencies or to the unions representing their workers. They have lamented 28 that workers were left waiting for wage increases Wolfers, supra note 10. 29 during the first several months after the tax cut, Otani, Rubin, and Francis, supra note 9. 30 even throwing in an allusion to Samuel Beckett’s Emily Stewart, “Corporate Stock Buybacks Are Booming, Thanks to the Republican Tax Cuts,” Vox, May 22, 2018. famous play, Waiting for Godot. 31 Senate Democrats, “Special Report: The #GOPTaxScam Is Setting All the Wrong Records” (Feb. 28, 2018).

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“Rather than use their massive tax windfalls to their tax windfall; they are paying that money out Tax 38 invest in American workers, big banks are instead in the form of stock buybacks and dividends.” Analysts. using their tax cuts to line the pockets of top One misdirected list deserves another. Just as executives and shareholders.”32 Americans for Tax Reform maintains a list of

Americans for Tax Fairness provides companies attributing employee bonuses and All information about how businesses in general, and wage increases to the tax cut, Americans for Tax rights large businesses in particular, are “spending their Fairness maintains a list of companies Trump Tax cuts.”33 A CNN story by Matt Egan announcing stock buybacks (including buybacks reserved. examines “how businesses are really spending that companies did not attribute to the tax cut). As their tax cuts.” Egan said that the tax cut was sold of July 25, the list shows $617 billion of buybacks as a policy “that would unlock an ocean of money since December 20, 2017.39 As discussed above, Tax

Corporate America could spend on job-creating total employee bonuses and wage increases are Analysts investments,” noting that “instead of plowing around $7 billion.40 Based on dollar amount, money into creating jobs, some businesses are Americans for Tax Fairness has the bigger list. 34 using their tax windfall to pay down debt.” The large volume of buybacks is in accord does Many opponents complain about the wave of with the stylized economic theory. As discussed stock buybacks that followed the enactment of the above, the repatriation provision by itself should not TCJA. Paul Waldman described supporters of the have resulted in distributions to shareholders claim rate reduction as saying “corporations would take with no increase in investment. Although the the money and use it to create new jobs and raise corporate tax rate reduction and expensing copyright the wages of those working for them, as trickle- should increase investment, which might down economics did its magical work,” and diminish the distributions to shareholders, a large in

opponents as saying “corporations would use increase in distributions to shareholders should any most of their windfalls for things like stock still occur because of the large volume of buybacks” and concluded that the opponents repatriation. Hassett correctly noted at a February public were correct.35 In a February 14 statement, Sen. 22 White House briefing that the buybacks are Ron Wyden, D-Ore., criticized the claim that due to repatriation41 and aptly noted at a March 21 domain “corporate tax cuts would get turned around Senate Budget Committee hearing that the wage

immediately into workers’ pockets” and said that increase “comes from capital formation, which or “twenty times more money has been spent on happens over time. The buybacks are going to be third stock buybacks than on worker bonuses over the front-loaded.”42 party last few months.”36 Columnist Robert Kuttner

wrote that “instead of increasing domestic B. Talking About Happiness content. investments that might produce jobs, Sen. Marco Rubio, R-Fla., received wide corporations mainly used the money to buy back 37 attention in late April when he said, “There is still shares of their own stock.” An article by Damon a lot of thinking on the right that if big Silvers of the AFL-CIO comments, “Where did all corporations are happy, they’re going to take the the money go? Corporations are not reinvesting money they’re saving and reinvest it in American workers. In fact, they bought back shares, a few

32 Brown press release, “Brown Demands Big Banks Use Tax Cuts to Bring Back US Jobs” (May 8, 2018). 33 Americans for Tax Fairness, “Trump Tax Cut Truths.” 34 Matt Egan, “How Businesses Are Really Spending Their Tax Cuts,” 38 CNN.com, May 22, 2018. Silvers, “6 Months In, GOP Tax Bill an Utter Flop,” The Hill, June 22, 35 Waldman, “Shocker: Democrats’ Predictions About the GOP Tax 2018. 39 Cut Are Coming True,” The Washington Post Plum Line blog, Feb. 27, Americans for Tax Fairness, “Stock Buybacks.” 2018. 40 36 See the discussion by Otani, Rubin, and Francis, supra note 9. Wyden, “Wyden Statement at Finance Committee Hearing on 41 Republican Tax Law, Treasury’s Fiscal Year 2019 Budget” (Feb. 14, 2018). Jonathan Curry, “Hassett Links Post-TCJA Shareholder Windfall to 37 Repatriation,” Tax Notes, Feb. 26, 2018, p. 1268. Kuttner, “Trump’s Tax Cut Snake Oil Should Be the Story of the 42 Midterms,” The Huffington Post, July 1, 2018. Quoted by van den Berg, supra note 23.

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gave out bonuses; there’s no evidence whatsoever D. Seeking Instant Wage Hikes Tax

that the money’s been massively poured back into Analysts. 43 Because the wage increases induced by the the American worker.” productivity boost from new investment occur Rubio was clearly correct that whether a over a period of years, the lack of immediate wage All corporation or its managers are “happy” does not increases sheds no light on the success or failure rights alter hiring and pay decisions. A corporation’s of the corporate tax cut. Nevertheless, many hiring does not increase if its managers attain bliss

opponents have seized upon the absence of reserved. through increased corporate cash flows, noticeable wage increases in the months after the rewarding relationships, or spiritual fulfillment; TCJA was enacted. hiring does not diminish if the managers are

In an April article, Manuel Madrid noted that Tax driven to despair by reduced corporate cash “nearly four months” had elapsed since the TCJA

flows, family tragedies, or existential angst. As Analysts was enacted, and he commented, “Working- and my AEI colleague Ramesh Ponnuru noted, Rubio middle-class Americans standing by for those responded correctly to politicians’ arguments that corporate-tax-cut-fueled wage increases to appear corporations would give their tax savings to does now understand how Vladimir and Estragon felt workers but failed to address the economic 48

in Waiting for Godot.” Silvers commented in June, not theory’s prediction that wages will gradually rise

44 “Working people are still waiting for their $4,000 claim due to an expansion of the capital stock. raise. Average hourly wages have actually gone

C. Looking at Cash Holdings down slightly, after adjusting for inflation, since copyright the tax bill passed.”49 Kuttner asserted at the In keeping with the notion that investments beginning of July that “the verdict is already in on

and employment result from past cash flows, pay increases. Worker pay has remained flat for in

many opponents have complained that the past 12 months, according to the Bureau of any 50

corporations already had ample cash holdings Labor Statistics.” In view of the time frame public from which they could make investments, hire, or envisioned by the economic theory, the verdict

raise wages. One commentator noted that clearly cannot yet be in. domain corporations were “sitting on mountains of cash. If they wanted to invest, create jobs, and raise E. Yearning for Generosity wages, they already had the means to do so.”45 or

As discussed above, the economic theory does third Another said, “It’s not like companies were not assume or rely on altruism by corporations.

strapped for cash prior to the tax law. Companies party 46 Nevertheless, many opponents of the corporate were already sitting on record amounts of cash.” tax cut have complained about the lack of Rampell said, “Companies including Apple were content. corporate altruism. Madrid complains about already sitting on mountains of cash. . . . If firms 51 corporations’ “stinginess toward workers.” A wanted to expand, hire, or raise wages, they easily 47 USA Today story stated that “the sharing of wealth could have done so.” The stylized economic has not been as generous as hoped,” discussed the theory makes clear, however, that corporations uses of the money “not shared with workers,” and make investment and hiring decisions based on presented a graphic about companies the profitability of those decisions rather than the 52 “withholding the wealth.” The Americans for amount of cash they have on hand. Tax Fairness website has a “Corporate Cheapskates” page listing 900 companies that

48 43 Madrid, “Waiting — and Waiting — For Corporate Tax Cuts to Quoted in “Marco’s Makeover,” The Economist, Apr. 26, 2018. Deliver Those Wage Hikes,” Prospect.org (Apr. 13, 2018). 44 49 Ponnuru, “Rubio on Corporate Taxes,” National Review, May 1, Silvers, supra note 38. 2018. 50 45 Kuttner, supra note 37. Waldman, supra note 35. 51 46 Madrid, supra note 48. Egan, supra note 34. 52 47 Adam Shell, “Tax Cut Savings Flow to Company Stockholders, Rampell, supra note 26. Trickle to Hourly Workers,” USA Today, Apr. 13, 2018.

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“have not committed to sharing the benefits of law, saying that “Americans deserve an honest Tax their new tax cuts with employees either through accounting of what corporations are actually Analysts. a bonus or a wage increase.” Another page on the doing with the estimated trillion dollars in website lists examples of “corporate generosity corporate tax cuts.”57 As will be discussed below, 53 from tax cuts that are much less than they seem.” Sen. Tina Smith, D-Minn., has also asked large All

pharmaceutical companies to account for their rights F. Demanding Accountability use of their tax savings. reserved. Former Labor Secretary Robert Reich G. Protesting at the Pump and Pharmacy commented that the “tax cut was made on the promise that money would be used for wages.”54 In a bizarre twist, some opponents of the Starting from that assumption, it may seem corporate tax cut have complained about its Tax reasonable to demand that corporations account failure to lower gasoline and drug prices. In a May Analysts for their use of the tax savings. In his May 8 press 22 report titled “Trump’s Tax Scam Hands Billions release, Brown said large banks “need to provide to Big Oil as Gas Prices for Working Families Congress and the American people with detailed Soar,” Senate Finance Committee Democrats does strategies on how their companies plan to reinvest complained that average gasoline prices had risen not in U.S. workers and their communities” and nearly 25 percent since the TCJA was enacted and explained that he had written to the CEOs of six were headed to their highest level in three years.58 claim large banks asking them to present such My AEI colleague Benjamin Zycher recently copyright strategies.55 provided a thorough explanation of the lack of an In April 2018, four labor unions (the economic link between the tax cut and the rise in gasoline prices.59 Communications Workers of America (CWA), the in

Service Employees International Union, the The pharmaceutical industry has received any

American Federation of Teachers, and the even more attention than the oil industry. In a public Teamsters) sent letters asking 11 of the companies March 1, 2018, press release, Smith described

whose workers the unions represent to detail their letters that she wrote to the chief executive officers domain use of their tax savings. CWA President Chris of five pharmaceutical companies expressing Shelton said, “Working people deserve to know concern that they were “using billions of their tax how their employers plan to spend their tax cut dollars” to enrich stockholders rather than or savings so they can bargain for a fair share of the “prioritizing lower prescription drug prices.” She third

windfall.” The letters asked how much of the tax said that she would expect the companies to take party savings had been reserved to increase wages, advantage of the “opportunity” to make create jobs, or bring jobs back to the United States prescription drugs more affordable. She asked the content. and how much of the tax savings had instead been CEOs to list all changes to the list prices of drugs diverted to other purposes.56 made since November 2, 2017, as well as any On February 7, 2018, Wyden asked the changes to buybacks, dividends, officer bonuses, Government Accountability Office to “study how and research and development spending.60 American corporations are implementing” the tax Sen. Cory Booker, D-N.J., recently said, “Given the windfall that pharmaceutical companies are anticipating as a result of the Tax

57 Letter from Sen. Wyden to Comptroller General Gene L. Dodaro, “Wyden Calls for GAO Study of Corporate Activity, Taxes Paid” (Feb. 7, 53 2018). Americans for Tax Fairness, “Corporate Cheapskates.” 58 54 Finance Committee, “Trump’s Tax Scam Hands Billions to Big Oil Quoted by Matt Egan, “For Most Workers, the Tax Cut Windfall as Gas Prices for Working Families Soar” (May 22, 2018). Will Disappear,” money.cnn.com, Mar. 8, 2018. 59 55 Zycher, “The Senate Finance Committee Minority on the Trump Brown, supra note 32. Tax Cuts and Gasoline Prices,” American Enterprise Institute (June 21, 56 2018). Communications Workers of America press release, “America’s 60 Largest Unions Demand Employers Disclose Corporate Tax Windfall Smith, “Sen. Smith Questions Pharma CEOs on Use of Corporate Amid Bargaining Talks Nationwide” (Apr. 4, 2018). Tax Cuts” (Mar. 1, 2018).

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Cuts and Jobs Act, there is no excuse but to act to what the economy would have done in the Tax 65 lower the cost of prescription medications.” His absence of the bill.” Kyle Pomerleau of the Tax Analysts. staff prepared an “investigative analysis” Foundation and former CEA chair Jason Furman, demonstrating that pharmaceutical companies who is now at the Peterson Institute, have also

were not “using that money to help working emphasized that we cannot observe what would All 61 families afford medications.” An April 2018 have happened in the absence of the corporate tax rights report by Americans for Tax Fairness similarly cut.66 complained that “none of the Pharma Big 10 has The revenue loss, and the resulting increase in reserved. announced any plans to use their tax cuts to government debt, caused by the corporate tax cut reduce prescription drug prices.”62 and the other provisions of the TCJA deserve careful attention. The debt may crowd out Tax V. Implications and Conclusion investment, reducing or possibly even Analysts The tax community should help get the debate eliminating the economic benefits of the corporate back on course. The corporate tax cut’s primary tax cut. benefit is its improvement in investment Moreover, the tax increases and spending cuts does incentives, which paves the way for higher output required to finance the debt will impose costs on not and wages. The tax cut’s primary drawback is its the affected households, which must be included revenue loss, which may crowd out investment by in the evaluation of the tax cut. The impossibility claim pushing up interest rates and which will of observing the counterfactual is also relevant in copyright eventually force future tax increases or this context. We will never know which future tax entitlement benefit reductions to be adopted. increases and spending cuts are because of the TCJA because we cannot observe the tax and

Investment is the crucial early indicator in an in

assessment of the corporate tax cut because an spending decisions that would have been made any had that law never been adopted. Nevertheless,

increase in investment is the first step in the public stylized economic theory. Hassett rightly the government’s intertemporal budget constraint implies that future tax increases and spending

commented that “the sign that we really need to domain see” to judge the effects of the tax cut are whether cuts with a present discounted value equal to the “capital spending goes up as a share of GDP next revenue loss must be adopted. year.”63 Independent policy analyst Alan Cole and Republican leaders have expressed a or the Tax Foundation’s Scott Greenberg have also preference that the revenue loss be offset by third

recognized that investment is the crucial early spending cuts. In a recent press release, Ways and party indicator.64 Means Committee Chair Kevin Brady, R-Texas, Neither supporters nor opponents can make stated that Washington has a “spending problem” content. dogmatic statements about the investment effects rather than a “revenue problem” and called on of the corporate tax cut. As Benjamin R. Page of Republicans and Democrats to “come together to the Urban-Brookings Tax Policy Center stated address both mandatory and discretionary shortly after the enactment of the TCJA, “It’s difficult to evaluate the impact of the tax bill from the performance of the economy because so many factors impact the performance, and because by its nature we can’t observe the counterfactual —

61 Booker, “With New Tax Savings, Drug Companies Start by Rewarding Stockholders, Not Patients Struggling With Skyrocketing Prices” (Apr. 9, 2018). 62 Americans for Tax Fairness, “Bad Medicine: How GOP Tax Cuts Are Enriching Drug Companies, Leaving Workers & Patients Behind” (Apr. 2018). 63 65 Quoted by Curry, “Measuring Tax Cuts’ Success in 2018 a Id. Challenge for Economists,” Tax Notes, Jan. 15, 2018, p. 306. 66 64 Curry, “Economic Report Gives White House Support for Tax Cut Id. Prediction,” Tax Notes, Apr. 2, 2018, p. 101.

TAX NOTES, AUGUST 6, 2018 823

spending.”67 Spending cuts would need to include benefit reductions are regressive, placing a Tax

mandatory spending, often called entitlement heavier burden, as a share of income, on Analysts. spending, because it is a large and growing part of households with lower incomes.71 A corporate tax the federal budget.68 cut financed by increases in other taxes is also

Because corporate tax receipts are part of likely to boost economic growth and increase All general revenue, a decline in corporate tax inequality, but both of those effects may be rights receipts clearly places downward spending smaller.72 pressure on entitlement programs financed by In short, a corporate tax cut can raise reserved. general revenues, including Medicare Parts B and economic output but is likely to increase D, Medicaid, and the section 36B refundable economic inequality. An assessment of the health insurance premium tax credits. Although corporate tax cut requires a decision about the Tax

Social Security and Medicare Part A are legally desirability of that outcome. Unfortunately, much Analysts financed by earmarked payroll and self- of the recent debate has diverted attention from employment taxes, they may also be affected. that fundamental tradeoff.

Changes to Medicare Part A have often been does considered and adopted as part of the budget process. Social Security has sometimes received not explicit or implicit general-revenue transfers.69 A claim reduction in the amount of available general revenue may prompt a future Congress to adopt copyright benefit cuts rather than general-revenue transfers when addressing Social Security’s fiscal in

imbalance. Some opponents of the law are any emphasizing the potential cuts in Social Security and Medicare.70 public Long-run economic growth is likely to be enhanced by a corporate tax cut financed by cuts domain in entitlement benefits, at least if the debt buildup is restrained by adopting the entitlement cuts or relatively quickly. That policy mix, however, third clearly increases economic inequality. The party corporate income tax is progressive, even

accounting for the portion of the burden that falls content. on workers. In contrast, virtually all entitlement

67 Brady, “Brady Statement on CBO 2018 Long Term Budget Outlook” 71 (June 26, 2018). Contrary to a common misperception, even benefit cuts that are 68 larger in dollar terms at higher income levels are regressive if the benefit Congressional Budget Office, “The 2018 Long-Term Budget cuts are a smaller share of income at higher income levels. For further Outlook,” at 15 (June 2018), projects that from 2018 to 2048, under discussion of the misperception, see Sita N. Slavov and Viard, “Taxes, current policies, Social Security will grow from 4.9 percent of GDP to 6.3 Transfers, Progressivity, and Redistribution: Part 2,” Tax Notes, Sept. 26, percent and major health insurance programs will grow from 5.2 percent 2016, p. 1879; and Gene Steuerle, “And Equal (Tax) Justice for All?” Tax of GDP to 9.2 percent while all other non-interest programs will shrink Notes, Jan. 10, 2000, p. 269. from 8.9 percent of GDP to 7.6 percent. 72 69 For a study of the distributional effects of the TCJA that includes Viard, “Social Security and the General Treasury: Who’s Raiding the future tax increases or benefit cuts, see William G. Gale, Surachai Whom?” Tax Notes, Feb. 21, 2011, p. 943. 70 Khitatrakun, and Aaron Krupkin, “Winners and Losers After Paying for Curry, “Progressives Urge Democrats to Hammer Republicans on the Tax Cuts and Jobs Act,” Urban-Brookings Tax Policy Center (Dec. 8, Tax Cuts,” Tax Notes, June 25, 2018, p. 2005. 2017).

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