Promising More of Everything -- Except for Growth

Veronique  de Rugy
|
Posted: Aug 18, 2016 12:01 AM
Promising More of Everything -- Except for Growth

Hillary Clinton recently laid out her plan for the economy, which boils down to more government, more spending, more taxes, more regulations and more red tape. It translates into more debt and less growth. Some of the most outrageous provisions of her plan are those that target U.S. corporations abroad.

To be fair, Clinton's policies are very similar to those of President Barack Obama. They both want to prevent U.S. companies from leaving the country through a process called inversion. They both also fundamentally misunderstand the reasons behind inversions and try to fix the perceived problem by treating the symptoms rather than the causes.

The reason companies engage in inversions (usually by merging with a foreign firm to pay taxes abroad instead of at home) is obvious to most economists: U.S. companies doing business overseas are put at a terrible disadvantage because of our punishing corporate income tax system. The United States has the highest rate of all the Organization for Economic Cooperation and Development countries (35 percent at the top federal level and close to 40 percent when you add state taxes), including all the big welfare states in Europe.

The United States also taxes income on a worldwide basis. This means that a U.S. company operating in Ireland pays the Irish rate first on its Irish income and then will pay the U.S. rate minus the tax paid in Ireland when it brings the income back to the United States. Contrast that with a French competitor doing business in Ireland. The French company pays the low Irish rate of 12.5 percent, period. To cope with the penalty or to try to remain competitive, U.S. companies are either not bringing their income back to the United States (there's supposedly $2 trillion of earned U.S. income abroad) or performing inversions.

As it happens, there is wide bipartisan support to reform the corporate income tax. But it wouldn't happen under a President Clinton. Her plan would change a key rule to make it more difficult to invert. Another portion of her plan would limit the deductibility of interest when it is supposedly used as a tool to avoid American taxes. Never mind that it would be up to the government to decide when the use of such a deduction would be appropriate or not.

Another provision is an "exit tax" on companies that relocate outside the United States without first repatriating earnings kept abroad. This one is particularly awful because it amounts to demanding a ransom from companies when they decide that enough is enough and that the survival of their business requires them to effectively change their citizenship.

Interestingly, Clinton may have gotten this authoritarian idea from her husband, who enacted a law in 1996 that imposes an exit tax on people who decide to move abroad and change their citizenship to avoid the same punishing tax system. It's worth noting that the United States is one of the very few countries taxing individuals on worldwide income.

What's stunning is that Clinton's refusal to reform the corporate income tax doesn't fit well with her claim that she wants to help American workers and that she cares about rejuvenating left-behind communities, such as Detroit. The economic literature shows that workers are shouldering the burden of the corporate income tax.

Writing in The Wall Street Journal, the American Enterprise Institute's Kevin Hassett and Aparna Mathur note, "Our empirical analysis, which used data we gathered on international tax rates and manufacturing wages in 72 countries over 22 years, confirmed that the corporate tax is for the most part paid by workers." In a piece appropriately called "The Cure for Wage Stagnation," they also cite works by the University of Michigan and Harvard University, among others. For instance, they write, "In (a) 2009 paper, (Kansas City Fed economist Alison) Felix and co-author James R. Hines of the University of Michigan discovered that the effects of lower tax rates are especially strong for union workers."

You would think that Clinton would be more favorable to helping low-income Americans and union workers in particular. If she were, the way to go would be to reform the corporate income tax, not to arbitrarily prohibit companies from moving to where tax laws are less punitive.