The Tax Foundation adds that “[i]f the Biden tax plan were fully implemented, the U.S. rank on the Tax Foundation’s International Tax Competitiveness Index would fall from 21st in 2020 to 30th, with the corporate rank falling from 19th to 33rd overall.” It’s hard to see how this could possibly be good for attracting new companies, entrepreneurs, and investment in the United States.
But What About …
Okay fine, corporate tax fans say, that’s the basic economic theory, but it’s not reality. In particular, these folks commonly allege that we need higher corporate taxes because certain large companies—Amazon, for example—pay “no taxes” or because the TCJA simply didn’t boost business investment as intended. Neither case, however, withstands serious scrutiny.
On the common claim that corporate taxes need to be higher to force Amazon and other big companies—especially tech companies—to pay their “fair share,” there are a few problems. First, as already noted, large corporations don’t actually pay these taxes and shareholders pay only a portion of them. Many companies, moreover, can often avoid U.S. corporate taxes by moving offshore or maintaining a noncorporate form. Second, in almost all of these cases, the companies aren’t doing anything illegal.
Third, and relatedly, this criticism ignores why Amazon and many other U.S. corporations that allegedly pay low or “no” taxes actually have tax bills like that: because they’re doing precisely what Congress told them to do. The Wall Street Journal’s Richard Rubin walked through Amazon’s case back in 2019, looking at its public tax records from 2018 (TCJA) and prior years (pre‐TCJA, obviously). He finds that not only did Amazon pay $1.2 billion in 2018 taxes—up from only few hundred million in 2015–16—but the reasons for its still‐relatively low effective tax rate (ranging from 8 to 13 percent since 2002) were neither nefarious nor an indictment of current law. In particular, Amazon lowered its taxable income in three main ways: (1) applying previous period losses (“carryforwards”), which let all companies “smooth tax payments across business cycles and a company’s lifespan”; (2) tax credits mainly related to R&D; and (3) deducting (“expensing”) business investments (e.g., cloud computing or solar farms), on which Amazon spent more than $160 billion since 2011. Many other large companies — as even their left‐leaning critics acknowledge—have employed similar (lawful) strategies to lower their tax liability.
One can argue that some of these tax rules should be changed—for example, the R&D tax credit has been found to suffer from design and implementation problems—but that doesn’t refute the aforementioned data and research on U.S. corporate tax rates generally, nor is it an indictment of the now‐lower U.S. corporate tax rate. As Rubin put it, “the current corporate tax system was designed by Congress to encourage investment and research and let companies realize the benefit of early losses when they become profitable.” Amazon and many other companies utilize those rules as Congress intended, and Biden’s team doesn’t appear to be targeting them. Indeed, they might actually expand corporate tax incentives—precisely the wrong approach if one worries about corporations taking advantage of corporate tax “loopholes,” especially when combined with a higher statutory rate that would encourage companies to use them.
Second, we hear today that the TCJA failed because U.S. corporations simply bought their own stock (“buybacks”) instead of plowing that money back into the economy (for example through investment or pay raises). However, as Cliff Asness explained in 2018 (or Tyler Cowen or John Cochrane or Ryan Bourne, all around the same time), the “buyback” hysteria reflects a fundamental misunderstanding of corporate finance/governance and basic macroeconomics. In short, an initial round of share repurchases was the predictable result of a bunch of corporations having unplanned “excess capital” on their hands when the law took effect—choosing to distribute that money to shareholders instead of plowing it back into the company. However, those shareholders can (and almost certainly will) reinvest any cash windfalls into other, likely more productive U.S. endeavors; the “buyback companies” can (and actually do) use debt (e.g., corporate bonds or loans) to raise new capital for wages or investments; and there is little long‐term connection between share repurchasing and corporate investment levels (see also, this Federal Reserve research helpfully summarized by Schneider). As these guys note, economic theory says that, over the longer term, total business investment will rise, regardless of any share buybacks.
Unfortunately, the pandemic intruded on the TCJA’s corporate tax/business investment experiment, but the initial returns (pun intended!) weren’t nearly as bad as some critics have claimed—even the ones who didn’t make rudimentary analytical mistakes. As Schneider noted last year, for example, U.S. business investment in 2018 and 2019 easily beat the CBO’s pre‐TCJA forecast and “ended up matching what CBO said would occur even in the face of a trade war and rate hikes”: