More than two years ago, President Donald Trump overhauled the U.S. tax code, giving the Republican Party its biggest legislative accomplishment of the 21st century. Serving on the White House Council of Economic Advisers, I helped articulate the vision for the corporate tax cuts and reforms.
Even before the law passed, critics argued, quite vocally, that the cuts would increase the deficit and expand inequality. But these critics failed to grapple with the Trump administration’s overarching goal in cutting the corporate rate: to enable American workers and firms to compete against their foreign counterparts. “When our workers have a level playing field, which they didn’t have, they can compete and win against anyone in the world,” Trump said in 2018 in Ohio, a state where workers have historically suffered the costs of globalization. “And that goes for our companies. But we were forcing our companies out.” As officials try to bring the economy back to normal, they would do well to remember this vision.
The United States used to have the highest statutory corporate-tax rate of any developed country. Our competitors had been cutting their tax rates as ours stood still. These disparities encouraged companies to leave America—or discouraged them from moving here at all. As companies looked elsewhere, the United States lost out on new jobs and new investments.
When the U.S. lowered its corporate-tax rate, the purpose was to boost America’s competitiveness on the global stage so that the U.S. workforce and the country’s corporations would both win. Sure, American corporations would gain higher profits, benefiting their shareholders and executives. But as new jobs emerged, American workers would earn higher wages.
Economists debate the extent to which the benefits of corporate-tax reform accrue as profits to a country’s corporations versus wages to its workers. But from the Trump administration’s point of view, squabbles about what share of America’s gains would go to its individuals or its corporations, blue-collar or white-collar workers, are beside the point.
“Our country wins because we’re all in this together. We’re one team, one people, and one family,” Trump said in his speech in Ohio.
The Trump administration’s corporate-tax overhaul was motivated by this inclusive concept of the nation’s economic interest. In the administration’s view, incentivizing corporations to do business in America complements rather than threatens the interests of America’s workers. This view reflects a bipartisan consensus within economics literature. Even Gabriel Zucman, the progressive economist who advised the Democratic former presidential candidate Elizabeth Warren on her tax plans, seems to agree with Trump’s Council of Economic Advisers on this point: In the world as it normally exists, higher corporate-tax rates tend to lower wages. The logic is straightforward. Governments impose taxes on the incomes of both individuals and corporations. Whereas corporations may leave a country when their tax rates go up, workers cannot. They stay even as the businesses and jobs depart. As a result, economists disagree not about whether a country’s workers suffer when its government’s corporate tax code is uncompetitive, but only about how much of the corporate-tax burden ultimately falls on the country’s workers rather than its corporations.
Many who criticized us at the Council of Economic Advisers wielded estimates implying that every $100 in higher wages for America’s workers came with $230 in new corporate profits. We didn’t agree with their estimates. I still don’t. But even if those estimates are true, should America’s government deny $100 to its workers for the sake of denying $230 to its businesses? For these estimates to translate into criticism of the policy, you’d need to defend a “yes” answer.
Businesses in America, like U.S. workers, compete beyond the country’s borders, and winning the competition is in America’s national economic interest. From the Trump administration’s point of view, then, this “yes” answer would lower inequality at the expense of the country’s national interest.
In conventional supply-side economic models, lower taxes on individuals or businesses incentivize the creation of investment and economic output that would otherwise never have existed. But the Trump administration’s corporate-tax overhaul can boost wages by enticing the investment and job creation happening somewhere else to come to the U.S. Supply-side à la Trump doesn’t necessarily expand the global pie, as the conventional supply-side wisdom would require. America can simply grab a bigger share of the pie.
Prominent Democrats would raise the corporate rate, if they could. Joe Biden, the presumptive Democratic nominee, has declined to propose raising the corporate-tax rate back to the 35 percent that persisted before Trump’s overhaul. Like President Barack Obama, who recognized the burdens of an excessively high corporate-tax rate, Biden proposed settling on 28 percent—higher than today’s 21 percent. Senator Bernie Sanders, when he was still running, advocated restoring the old 35 percent rate. Biden and Sanders cited some combination of fairness and inequality alongside deficit-driven concerns to defend their positions.
When it comes to inequality, however, the sound and fury has so far failed to find expression in the actual data. U.S. Census Bureau measurements show decreases in direct measures of American income inequality since the new tax law was passed. Additional data indicate an acceleration in wages among the lowest-earning Americans relative to their higher-earning counterparts, a trend likely to further decrease metrics of inequality.
As for the deficit, the data do show that revenue from corporate-tax collection has decreased since the legislation passed. In 2019, U.S. corporate-tax receipts were $230 billion, down from $300 billion in 2016. This suggests a deficit contribution from the corporate-tax overhaul of about $70 billion—or about 0.3 percent of GDP. Though the interest rate on U.S. government debt remains near record lows, the costs of the deficit increase may be real. Even so, a policy that advances the administration’s economic and national-security priorities is worth that cost.
But the case for prioritizing America’s competitiveness would remain strong even if the data corroborated the critics’ concerns about inequality. The American public seems to agree with the Trump administration that protecting American jobs from overseas competition should be a bigger priority for the U.S. government than worrying about which Americans are doing better than others.
A 2018 Pew Research Center poll asked Americans to identify issues that should be top foreign-policy priorities. The No. 1 answer was “taking measures to protect the U.S. from terrorism.” The second-highest priority was “protecting jobs of American workers.” Meanwhile, according to a separate survey asking about domestic problems, the “gap between rich and poor” hasn’t registered as a priority among more than about 5 percent of Americans in at least a decade.
In the time since its passage, economists have interrogated each new release of economic data for evidence of the tax reform’s effects. Only the mumbles from future data can tell the full story of whether the corporate-tax overhaul did, or did not, work as promised. But questions about inequality and deficits are beside the point. What the administration aimed to do was improve America’s competitiveness.
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