It’s a hard truth for many partisans to accept: Sometimes your political enemy manages to do a good thing. Maybe your enemy stumbles into it by accident or misleads voters to make it happen. But none of that means that they can’t, on occasion, make what turns out to be a pretty smart and beneficial decision.
Sorry, Democrats, but President Trump’s big corporate tax cut was just such a good thing. That’s why President Biden wants to keep lots of it.
Unlike with his $1.9 trillion COVID-19 relief bill, which is being financed by government borrowing, Biden wants to raise taxes to pay for some portion of his new proposal that would spend trillions on infrastructure, R&D, and Medicaid home services. Among the tax hikes being considered, Biden would raise the top corporate tax rate to 28 percent from 21 percent.
Yet that sizable increase would reverse only a portion of Trump’s corporate tax reductions. In one of the key provisions of the Tax Cuts and Jobs Act, passed in December 2017, the top federal corporate income tax rate was lowered to 21 percent from 35 percent. In one fell swoop, the United States went from having the highest corporate tax rate among rich countries to one that was about average.
At the time, Democrats said the Tax Cuts and Jobs Act was a costly gift to corporate America and rich folks at the expense of the middle class. But then why isn’t Biden trying to reverse all the Trump tax cuts, especially the ones to business? Why isn’t he trying to take that tax rate all the way back to 35 percent?
Well, for pretty much the same reason the Obama-Biden administration wanted to slash that tax rate a decade ago: basic economics. Tax rates affect how much and where a company invests. A place with a lower tax rate is a place where a company can earn more after-tax income generated by a new investment. More investment makes workers more productive and, over time, raises wages. Not only that, a country with a comparatively high corporate tax rate risks its companies relocating overseas.
That said, many Democrats still think the Trump tax cuts were a total failure — and an expensive one. It’s true that if you look at the economy before and after the Trump tax cuts, there doesn’t seem to be a whole lot of difference. Growth, productivity, and business investment seem about the same. There’s not much sign of the sharp and sustained surge that was promised.
Economists who support the tax cuts make two points in response. First, don’t confuse political arguments with economic ones. While Republican politicians may have sold the tax cuts by promising a flood of corporate cash into the domestic economy from overseas holdings, that’s not what the wonks expected. They were looking for a gradual increase in domestic investment, as companies searched out investments that would be made more profitable by the tax cuts.
Second, a month after Trump signed the tax cuts into law, he slapped tariffs on imported solar panels and washing machines. That began a series of trade spats that led to tit-for-tat tariffs by the United States and China. Many economists think the uncertainty and higher costs created by this trade war may have caused enough companies to defer their investment plans and seriously undermined the effectiveness of the tax cuts. What Trump gave with one action, he took away with another. As economist Steven Davis, co-creator of the Economic Policy Uncertainty Index, described it back then, companies faced “a tremendous, Trumpian upsurge in anxiety and uncertainty.”
One of my concerns about Trump’s trade policy — in addition to its aimlessness — was that it would mask the benefits of the corporate tax cuts and make it easier for Democrats to repeal them. Likewise, I was worried that not balancing out the tax cuts would make it easier for Democrats to avoid fully paying for their spending plans once they inevitably retook power in Washington. Now those concerns have become reality.
A 28 percent corporate tax rate isn’t so high as to kill the economy. But it also won’t make the economy more productive than the 21 percent rate does. And more importantly, it distracts Washington from pursuing a tax overhaul that both is economically efficient and raises sufficient revenue for the long term. This could be a consumption tax, such as a value-added tax, or a carbon tax, or both. Trump didn’t have any interest in that stuff, but Biden should. It would truly prove Trump wrong.
James Pethokoukis is the Dewitt Wallace Fellow at the American Enterprise Institute and a columnist for The Week. Follow him on Twitter @JimPethokoukis.