Karen G. Mills and Jan W. Rivkin
It’s hard to find a fan of the current U.S. corporate tax code in either political party. Established in 1986, when companies were far less global and mobile, the code suffers from three major flaws. First, the statutory tax rate on corporate profits in America—35% for federal taxes plus about 4% for the typical state—is the highest among major developed countries; the weighted average among the other 33 OECD countries is 28.3% and has declined steadily over the years. The high statutory rate discourages businesses from investing and operating in the U.S. Second, the code is so shot-through with loopholes that the effective tax rate is much lower than the statutory rate, somewhere in the mid-20% range. This is a bonanza for tax accountants and attorneys, but not for the country. Third, unlike almost all other countries, the United States taxes the profits that U.S.-headquartered corporations make overseas when those profits are brought back to America. That probably made sense in 1986, when U.S. corporations typically brought their overseas profits home. But today, this so-called “worldwide taxation” system encourages U.S. corporations to keep an estimated $2-3 trillion overseas instead of transferring it back to America to invest.
Donald Trump has proposed dropping the federal corporate tax rate from 35% to 15%; eliminating most corporate loopholes; and allowing companies to repatriate offshore profits at a one-time rate of 10%. Speaker of the House Paul Ryan has backed a comparable plan that reduces the corporate tax rate to 20%; eliminates most loopholes; and taxes repatriated cash at 8.75%. With Republican majorities in both houses of Congress, we are likely to see a push along these lines in 2017. Legislative success is far from certain, of course; tax reform is notoriously hard to pull off because so many and varied vested interests are in play. But the odds of success are higher than they have been in years.
Fixing an outdated corporate tax code is ultimately good news for America’s workers and cities. Intuitively, one might think that the main beneficiaries of lower corporate tax rates would be the shareholders of major corporations. But in fact, those shareholders are well-off regardless of the U.S. corporate tax code, thanks to the global mobility of capital; if the U.S. corporate tax code remains flawed, U.S. corporations will undertake more activities overseas, and they and their shareholders will prosper from those activities. The main impact of U.S. corporate tax reform is to shift the activities and investments of American corporations to U.S. locations, which creates jobs and boosts wages here rather than elsewhere. A recent nonpartisan study simulating the economic impact of various reforms concludes that reforms cause incomes to rise roughly equally (in percentage terms) across the income distribution.
City leaders have a stake in precisely how the corporate tax code is reformed. Some proposals, for instance, have granted companies low tax rates on repatriated profits only if those profits are invested in certain ways—for instance, only if a portion is put into a fund that sponsors U.S. infrastructure investments. Personally, we would favor a repatriation scheme that gives companies an incentive to invest in the skills of their workforces. Scarce, valuable skills are a worker’s best guarantee that he or she will share in the prosperity of an employer. Past experience shows just how important it is for low-tax repatriation of profits to depend on businesses taking other actions that benefit the broad base of Americans. In 2004, corporations were granted a short “tax holiday”: they were allowed to bring overseas profits back to the U.S. at a tax rate of roughly 5%. According to a 2011 Senate Democratic staff report, the 15 companies that benefitted the most from the 2004 tax holiday subsequently cut total employment, increased share buybacks, decreased R&D, and raised executive compensation. City leaders should lobby for repatriation arrangements that encourage companies to invest the returning profits in ways that benefit communities widely.
If the corporate tax code is reformed to allow repatriation of cash at a lower tax rate, city leaders would be wise to figure out which local employers are holding large reserves abroad and might be bringing them home. Such employers are prime candidates to expand their domestic operations and to create new jobs. Overseas cash holdings are concentrated in the high-tech and pharmaceutical sectors, with Microsoft, GE, Apple, Pfizer, IBM, Merck, Alphabet (Google), Johnson & Johnson, and Cisco each having more than $50 billion abroad. Cities with connections to companies like these should look for ways to convert national changes in the corporate tax code into local prosperity.
YALP participants, how do you foresee corporate tax changes playing out? What are the implications for your city?
 Martin Sullivan, “The truth about corporate tax rates,” Forbes, March 25, 2015.
 Scott A. Hodge, “The economic effects of adopting the corporate tax rates of the OECD, the UK, and Canada,” Tax Foundation, August 20, 2015. Federal receipts decline in the simulations as tax rates falls, but the ensuing domestic investment and growth reduce the decline by roughly 40%.
 Kristina Peterson, “Report: Repatriation tax holiday a ‘failed’ policy,” Wall Street Journal, October 10, 2011.
 Jeff Cox, “U.S. companies are hoarding $2.5 trillion in cash overseas,” CNBC, September 20, 2016.