U.S. President Donald Trump in the Oval Office of the White House. (Photographer: Andrew Harrer/Bloomberg)
President Trump plans to sell his tax plan by stressing the benefits cutting corporate taxes could have on ordinary Americans. In prepared remarks for a Harrisburg, Pa. speech Wednesday afternoon, Trump claims that typical American households will see a $4,000 increase in income, just from allowing companies to bring back money earned and invested overseas back into the country at a low tax rate.
“We will eliminate the penalty on returning future earnings back to the United States, and we will impose a one-time low tax on money currently parked overseas so it can be brought back home to America where it belongs,” Trump is prepared to say in the speech, the Post reported. “My council of economic advisers estimates this change alone will likely give the typical American household a $4,000 pay raise.”
It’s an idea that Trump’s chief economic adviser, Kevin Hassett, has been touting around Washington, telling an audience of tax wonks last week that if firms did not shift their profits abroad, the median household would get a $4,000 income boost over eight years. Hassett has also said that a cut in the corporate tax rate — from 35 percent to 20 percent — would boost wage growth, adding up to $7,000 in income. In the meantime, economists are waiting for details.
Some outside economists dismissed the promise of a $4,000 boost, while others said it was plausible.
“Absolute pie in the sky. They might just as well promise a unicorn in every pot,” Edward Kleinbard, a law professor at the University of Southern California and former chief of staff to the Congress’ nonpartisan Joint Committee on Taxation said in an e-mail.
But Phillip Swagel, an economist at the University of Maryland and a former assistant secretary at the Treasury under President George W. Bush, argued that while the precise benefit to individuals will not be known until the details of the plan are hammered out, the amount was illustrative of how individuals could benefit from the plan.
“When the U.S. has a more competitive tax system and we reduce the amount of profit-shifting, it makes sense to me that wages will be higher. But how much, exactly, it’s hard to know. That’s why the calculation is a reasonable one as an illustration,” Swagel said.
The White House plans to release a white paper this week explaining the details of its calculations.
“I wait anxiously for his paper,” said Kyle Pomerleau, director of federal projects at the right-leaning Tax Foundation. “I think it’s conceivable a robust tax reform proposal that does a lot to increase economic efficiency could boost income significantly for workers. I’m not sure just a simple corporate tax cut could lift wages by $4,000.”
The basic idea is that a lower corporate tax rate could spur wage growth by making it cheaper for companies to make new investments in the United States. What economists were less certain about was how decreased profit shifting abroad could increase wages. Theoretically, companies that no longer shift their profits abroad could use the money to make investments in the U.S. But they also could use that money to do share buybacks and higher dividends.
Aparna Mathur, an economist at the American Enterprise Institute who has collaborated with Hassett, said that the estimate of a $4,000 to $7,000 benefit for a typical household is a reasonable back-of-the-envelope calculation, although the effect would not be immediate and could take two years.
“I think the numbers make sense. I think the larger question is: what is the overall package?” Mathur said, pointing out that if the plan adds to the debt, it could be a drag on growth in the economy and would hinder the beneficial impact to households.
“When companies are looking at whether to build that new factory or expand, the tax rate plays a role. When they look at where to set up a new factory, the tax rate plays a role. The tax rate matters, not just where to make investment, but also where to expand investment. By cutting rates and making them more competitive, you’ll get that boost in investment,” Mathur said.
Joseph Rosenberg, a senior research associate at the Urban-Brookings Tax Policy Center, however, argued that it was unclear what the connection is between wages and profits earned abroad.
“It’s just where the location of profits are being reported,” Rosenberg said. “To a first order of approximation, it would largely benefit the shareholders.”