The president needs to go back to the drawing board.
Hope is not a corporate tax policy, yet the tax cuts President Donald Trump proposed at a Missouri rally Wednesday are exactly that—tax cuts based on hope. Trump and House Republicans hope that by reducing corporate tax rates, companies will in turn take the money saved in taxes and hire Americans. Yet they do not require companies receiving the tax cuts to hire Americans.
Under current proposals outlined in the speech, a company could eliminate American jobs, open operations overseas, and receive the same tax cuts as companies maintaining employment in America or companies creating jobs in America. The result is that all companies would receive the tax cut, whether or not they create jobs here at home. With a nearly $20 trillion dollar national debt, we no longer have the luxury of implementing universal and unconditional corporate tax cuts in the hope that companies use the tax savings to create jobs.
Instead of a hope-based corporate tax policy, we need a jobs-based corporate tax policy. We need a policy in which each company’s corporate tax rate is based on each company’s rate of job creation. We need a more strategic, results-driven tax policy in which tax cuts are tied to increased American employment, not the hope of job creation.
Universal corporate tax cuts, independent of the number of the jobs each company creates, are a highly inefficient policy. Providing tax cuts to companies eliminating American jobs reduces the magnitude of tax breaks available to companies creating jobs. Under current proposals, rather than allocating tax cuts only to job creators, tax cuts could be siphoned off and given to companies eliminating jobs in America, thereby reducing the tax cuts available for companies creating jobs. Unconditional tax cuts also would create disincentives to job creation. If companies calculate they are going to receive tax cuts whether they create jobs or not, there is no incentive to increase employment.
Implementing a jobs-based corporate tax policy would also address the hotly debated taxation of profits held overseas by American corporations. If each company’s corporate tax rate were tied to each company’s rate of job creation, companies could lower their tax rate on repatriated foreign-earned profits by increasing American employment. If the theory of lowering the tax rate on income earned overseas is that it will create American jobs, then tie the tax rate to actual jobs created.
A jobs-based tax policy would also be more efficient than a policy of immediate and 100% deductibility of capital investment. The idea behind current proposals for this is to spur investment. But what if a company builds a facility with foreign-sourced steel and fills the facility with foreign-made equipment instead of U.S.-made equipment? Under current proposals, American tax cuts could subsidize the purchase of these foreign-made goods. Instead of tying tax policy to capital investment that may or may not increase American employment, tie corporate tax rates to company hiring. Simply, if a company increases its American employment it pays a lower rate; if it doesn’t it won’t.
Questions surrounding outsourcing and H-1B visas would also be addressed. Companies outsourcing American jobs would pay a higher tax rate than companies maintaining American employment levels, creating an incentive to not cut jobs. A jobs-dependent corporate tax policy would also provide an incentive to companies currently using or considering H-1B visas to instead fill positions with Americans.
Rather than debating how much the corporate tax rate should be cut, policymakers in Washington first need to ensure that corporate tax cuts are actually doing what they’re supposed to do.
Chris Macke is the founder of Solutionomics.