Err, yes, yes, and?

In speeches pitching his tax plan to the country, Trump claims the U.S. has the highest corporate tax rate in the world, even though the truth is more complicated than that. He and other Republicans also argue that a lower corporate tax rate would create more jobs because corporations will use the money that is no longer tied up in taxes to create more jobs and higher wages. However, multiple studies have shown that this won’t be the case.

According to new analysis from Steven Rosenthal, a senior fellow at the Urban-Brookings Tax Policy Center, the only group significantly benefiting from a lowered corporate tax rate are wealthy foreign investors.

Analysis by Rosenthal finds that roughly 35 percent of U.S. corporate stock is owned by foreign investors. Slashing the corporate tax rate to 20 percent would translate to a tax cut for these investors worth $70 billion dollars, a cut three times the tax break that households in the middle income quintile would get under Trump’s tax plan.

And therefore foreign investors will invest more in the US, raising US productivity and wages.

That’s not a fault nor error, that’s the point.

30 thoughts on “Err, yes, yes, and?”

  1. Serious question for a change:

    As a (hypothetically speaking) wealthy foreign investor in a US company, how does a cut in corporation tax benefit me. The company pays less corporation tax therefore there’s an increase in profits and a slight increase in the dividend. I don’t see how that translates into a tax cut for the investors. Or am I missing something?

  2. “multiple studies have shown that this won’t be the case”: I love the daft notion that any study can tell you the certain outcome of tinkering with a complicated ill-understood system.

  3. Henry,

    Assuming corp tax is 30%, then a firm with a single shareholder and £100,000 in pre-tax profits will pay £30/- in tax, leaving the shareholder with a potential divi of £70/-. Cutting corp tax by a third, to 20%, will leave £80/-, or a 14% potential increase in the dividend. So a tax cut to the shareholder.

    Depends what the company actually does, as to whether the shareholder receives the increased dividend.

  4. Excellent news from HMRC and I am sure this is something that will be well received in Spudland. As we know he has been calling for an office of tax responsibility of which no doubt he sees himself as it’s obvious leader. But it’s no longer needed……

    HMRC are to appoint a second Permanent Secretary.

    This appointment will be called the Tax Assurance Commissioner.

    Due the the level of tax expertise and knowledge of the uk tax system required, HMRC will be limiting their search to existing civil servants only.

    I look forward to some very angry fist typing from spud.

  5. Andrew M, Ducky

    Thanks. But it still remains that the investor isn’t the recipient of the tax cut, the company receives the tax cut.

    I get that the cut in tax results in an increased dividend (presumably on which tax is also paid) but that isn’t the same as receiving a tax cut directly.

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  7. @Henry Crun – it’s a perfect example of tax incidence. Something Spud refuses to comprehend when it’s convenient to do so, and which he understands perfectly…. when it’s convenient to do so.

  8. Dennis

    ‘Lower corporate taxes and higher company profits leads to more capital for the company to invest in its business.’

    But it leads to less money for the State and less money for society to allocate in a ‘socially just’ fashion….

  9. Trump claims the U.S. has the highest corporate tax rate in the world, even though the truth is more complicated than that.

    Translation: he is right but we don’t want to say so.

  10. AndrewC

    “This appointment will be called the Tax Assurance Commissioner.

    Due the the level of tax expertise and knowledge of the uk tax system required, HMRC will be limiting their search to existing civil servants only”

    It is astonishing that HMRC and the Chancellor did not consult me about my availability for this position. I am, after all, the unimpeachable source of the most authoritative Tax Gap figures in the UK, the inventor of Country by Country reporting and the designer of the wildly successful Fair Tax Mark process.

    Richard Murphy (Professor)

  11. Presumably 65% are domestic investors, so that’s a big boost to pension funds. The question is, is that money better there than going to the government to be squandered on more pork for Democrat states.

  12. Per a thread from a few months ago there is a ton of money tied up outside the US in retained profits of US owned companies which under US tax rules is sheltered from US Corp tax in excess of local Corp tax for as long as profits not repatriated to the US. Lowering US tax rate will be likely to lead to large repatriations and distributions to shareholders.

  13. “Lowering US tax rate will be likely to lead to large repatriations and distributions to shareholders.” And tax being paid on those which otherwise wouldn’t have been. Hence lowering the tax rate increases the tax revenue. Who knew?

    ” the investor isn’t the recipient of the tax cut, the company receives the tax cut. ” Strictly speaking, you cannot be the recipient of a tax cut. You’re paying less tax but you’re still paying tax. I guess in murphy’s land, since all your money belongs to the state, it could make sense.

  14. This is the frustrating thing, that political decisions aren’t boiled down to the value judgement.

    Reduce tax on investment get more investment, seems to be a claim that may or may not be true.

    But most who would quite happily accept it as true still argue like buggery that it’s not.

    The more sophisticated version is that the investment is directed elsewhere. That is an improvement but if you’re going to go down (or is it up) a level then you’re also going to have to factor in the deadweight cost, an estimate of the admin cost and the non-market inefficiency of a bloke at a desk deciding where to allocate the proceeds. So in the absence of that i’ve just got to go with the version which makes total uncomplicated sense,, tax something get less of it.

  15. Ah i see i cut out a crucial part there.

    But most who would quite happily accept it as true [ and still advocate for the higher tax] still argue like buggery that it’s not.

  16. “… leaving the shareholder with a potential divi of £70/-. Cutting corp tax by a third, to 20%, will leave £80/-, or a 14% potential increase in the dividend. So a tax cut to the shareholder.”

    No, the shareholder will be paying more tax. Instead of paying dividend income tax on £70 they’re paying dividend income tax on £80, so 14% increase in tax due to that 14% increase in income.

  17. Surely the amount of overall tax paid by the ‘wealthy investor’ will be the same regardless of the tax cut, as long as the top rate of tax in his or her jurisdiction is higher than the rate of corporation tax?

    Corporation tax is just advance income tax really, isn’t it? Company pays x% on profits, pays out rest as dividends, investor pays difference between his marginal rate and X in additional tax. If the company pays less, the dividend receiver pays more, End result the same, in revenue terms.

    OK this being America there’s probably a million interlocking reliefs available that screw up the calculations but thats the basic principle isn’t it? A cut in corporation tax just means more income tax is paid? So no ‘tax cut’ for the rich?

  18. Surely, isn’t Mr Cru’s question answered bt the two words £tax incidence?”
    Companies don’t pay taxes. Only people pay taxes. So a reduction in corporation tax is a reduction in tax incidence on the investor.

  19. We have been here before with companies paying bonuses in lieu of corporation tax. The government gets more revenue, but the Left are playing this solely and cynically for the politics. Evil corporations letting kittens and orphans die because they won’t pay corporation tax.

  20. jgh; not necessarily, since that depends on the circumstances of the shareholder (s).

    But otherwise, yes. They’ll be writing a larger cheque, if they receive a larger divi.

  21. Bloke in North Dorset

    Leaving aside the funds that are outside the USA, in a competitive market any CT cut is eventually going to be passed on as price cuts for consumers and pay rises for workers.

    Otherwise we can’t argue that CT is really paid by customers and workers.

  22. If the company pays less, the dividend receiver pays more, End result the same, in revenue terms.

    Only true if they have imputation credits, as we do in NZ, so effectively the money is only taxed once.

    Let us, for simple maths, say both pay 20%. $10 earned would get $2 paid by the corporation, and $1.60 by the owner on the remaining $8. Total tax $3.60.

    If corporation tax is lowered to 10% then the $10 would have $1 paid in tax and the owner would pay $1.80 on the remaining $9. Total tax $2.80. A LOT less.

  23. @HenryCrun
    A company is a juristic person. Eventually, whatever it receives is distributed to its shareholders. Companies don’t pay tax, natural persons do. Companies send it to the Revenue.

  24. ‘The media’s favorite tax policy shop uses outdated economic models to serve Democratic political ends.’ – WSJ on The Partisan Tax Policy Center

  25. Chester, the US uses a different system but with a (somewhat) similar effect. Dividends are taxed at a lower rate, 15% I think it is, in recognition of the fact that the income used to pay that dividend has already been taxed.

    The issue often is that in the US the company may pay a significantly reduced tax % than the headline rate (up to no tax if there are significant incentives involved) but the reduced rate on dividends does not reflect that. The imputation method takes account of this, if a company pays only 10% tax for some reason, then the imputation credit available to the investor receiving the dividend is lower as a result and the dividend becomes taxable in the investors hands to a greater degree.

    It does seem a shame that the Trump plan does not introduce imputation as it does appear to be a superior system. However it would possibly raise less tax; the US Company rate is, I think, 36% and the dividend rate a further 15%, so a net rate of 47% or so. A full imputation system would possibly only raise tax at the 36% rate though i think high earning US taxpayers pay up to 39.6%. However there are numerous deductions so the average tax rate paid by US individuals is actually quite low – about 10% on an income of $100K. That’s a hell of a lot lower than a NZ’er would pay on the same income.

    I haven’t studied the Trump tax plan so I don’t know what loopholes it cuts, but there would be a lot to recommend from a drastically simplified tax code, and the NZ code is perhaps one to look at for that. Remove basically all allowances but have a low income threshold and some low end deductions, and tax the rest at relatively low rates with full imputation on company taxes plus a withholding tax on foreign investors.

  26. That’s a hell of a lot lower than a NZ’er would pay on the same income.

    Depends where they live in the US. NZers pay a decent whack in income tax and GST (VAT) is 15% and but there are no State taxes and low rates, because schools and hospitals are all centrally funded. We also don’t have payroll tax in the same way.

    https://taxfoundation.org/comparison-tax-burden-labor-oecd-2016/

    An American might only pay a low Federal tax, but the overall tax wedge is far higher. This despite NZ having nearly free health care (certainly by comparison to the US) and usually lower city rates.

  27. Chester, that’s not true except at very high incomes. NZ’ers are relatively highly taxed overall if you include all National, Excise, GST and local taxes and charges. And we get fewer deductions, like mortgage interest relief.

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