At the center of the 2016 Presidential election reigned one key issue: the economy. While industry jobs fled the country for cheaper alternatives, the American working class was left in with little cause for hope. Trump’s slogan struck a chord that the Democrats failed to acknowledge in this struggling class of workers and those workers, therefore, ultimately propelled him to victory.
One of the President-Elect’s policies popular among the working class was to lower the corporate tax rate as an incentive for companies to invest domestically rather than abroad. In theory, this investment at home would create jobs and ultimately improve the prospects for the working class, blessing them with a deserved sigh of relief in the wake of many companies taking their jobs elsewhere.
For years now, offshore outsourcing of manufacturing and service-sector jobs to foreign nations has continued to plague the American Economy, but those days could be over. A Canadian study investigating the impact of tax cuts on economic growth concludes that a reduction in the corporate tax rate raises annual growth by .1 to .2 points. Should this hold true, a reduction from a corporate tax rate of 35 percent to 15 percent would result in additional growth in the U.S. economy of anywhere between two and four percent.
While additional growth to this degree would be very beneficial to the U.S. job market, it would still be contingent on other policy changes the incoming administration looks to make. A repatriation rate (the tax rate that companies must pay to bring cash from foreign countries back to U.S. soil) of 35 percent is leading companies to hoard their cash overseas where they can let it sit untaxed. U.S. businesses often merge or acquire a foreign firm and then moves its headquarters to that foreign country in order to avoid these taxes.
The high rates that companies would pay to bring their funds back to the U.S., though, is hypothetically what causes these firms to leave their cash overseas. Data has shown that over $2.6 trillion resides in the foreign accounts of U.S. firms. Naturally, politicians like Trump (and ironically Bernie as well), supposedly eager to serve the people, would rather the money be invested in the U.S. market and taxed for use in domestic operations.
As an incentive for these firms to bring back their funds and invest in U.S. economic growth, the new administration has been throwing around the idea of a tax holiday, a day where firms can bring their money back to foreign soil for a significantly lower rate―10 percent as opposed to the current rate of 35 percent. As great as the idea sounds, there is a potential problem with it; how do you make sure that firms use these repatriated funds to invest in domestic operations?
The commonly referenced idea here is that this money goes directly into the pockets of shareholders and none of it is spent on investment in creating jobs and growing companies. However, the money is never taken out of the economy and, except for those who store it under their mattress, it is always spent or invested. Even something as simple as putting the money into a savings account with a bank can lead to investment as banks often lend out those funds, fostering business growth and development. Capital Economics economist Andrew Hunter says in a note to clients that “this vast pile of foreign cash could provide a substantial boost to GDP if it was ever brought home.”
While in theory these tax cuts would improve economic growth in the United States, their effectiveness hinges on the President-Elect’s ability to influence these companies to actually invest domestically. We have already seen Ford and Fiat Chrysler scrap plans to build plants in Mexico and instead invest money in creating jobs in the United States. After Trump became President-Elect, Ford announced that it was going to scrap a $1.6 billion project in Mexico and instead invest $700 million in a Michigan plant over the next four years while Fiat Chrysler announced it was going to invest $1 billion and create 2,000 jobs in Ohio and Michigan. While both companies have come out and said that they made this choice in the best interest of their business rather than pressure from Trump, both companies commended Trump for his focus on improving the business climate in the United States.
Donald Trump has threatened companies such as Ford, which attempts to take manufacturing jobs abroad, with a 35 percent tariff on cars manufactured in Mexico but sold in the United States. However, despite the high rates car manufacturers would face, companies like Fiat Chrysler say they could live with any new rules about manufacturing abroad, even if it would mean a large tariff on imports. Car manufacturers also have come out and said that free trade, rather than trade limited by tariffs may be more beneficial to the U.S. economy. A GM spokesperson says that the plants moving to foreign markets are producing cars that are popular in that region such as the smaller cars better fit for South America and Europe. By opening trade with these countries, manufacturing in the U.S could become competitive again benefiting both the manufacturers and the workers they hire to run their factories. In other words, tariffs would only prove to hurt exports by encouraging tariffs abroad in response.
Tax reform is, as it often has been, one of the first things on the agenda for the Republican government coming into power. Depending on the strength of the policy implemented, we could see either a large boost in U.S. economic growth or continued periods of stagnation if these policy changes prove unsuccessful. Studies show that increases in the corporate tax rate are the most harmful to economic growth; and the new leaders in government have the opportunity to significantly impact the economy with a corporate tax cut. If all goes well, a lower repatriation rate and a lower corporate tax rate would provide a nice boost to the U.S. economy. Higher rates simply scare businesses out of the United States. We will not see the results of Trump’s plans until they truly take effect, but if the results of the aforementioned studies prove consistent, the U.S should experience long-awaited growth over the next couple of years. Until that happens, a group that has felt neglected over the past couple elections awaits its relief.
— Matthew Jordan is Publishing Editor of THE ARCH CONSERVATIVE