Voters Don't Like Cutting Corporate Taxes
On Sunday, Swiss voters rejected a reduction in corporate tax rates by a 59 percent to 41 percent margin.
Some of the factors that drove their decision were unique to Switzerland and this particular referendum. The tax change had been forced on Swiss politicians by the European Union and the Organization for Economic Cooperation and Development, which don't like the preferential treatment the country has been giving to multinational corporations with operations there. It was a complicated proposal, and Finance Minister Ueli Maurer (of the right-leaning populist Swiss People's Party) doesn't seem to have done a great job of selling it. There were ramifications related to local-government finances that, well, I'm not going to pretend to understand.
Still, there do seem to have been some more universal factors at work. This was also a vote, as Markus Hafliger of the Zurich-based Tages-Anzeiger newspaper put it (translation mine), "against globalization, against opaque corporations, against a managerial caste perceived as out of touch with the real world."
Hafliger called this the "Trump-Effekt." That makes sense. It also highlights the political contradictions inherent in the "phenomenal" tax reform plan that President Donald Trump's top economic adviser, Gary Cohn, is currently cooking up -- a reform plan that will almost certainly include sharp cuts in corporate tax rates.
U.S. corporate tax rates are among the highest in the world. With a combined federal and state top marginal rate that averages 38.9 percent, just getting the U.S. down to the global average (weighted by gross domestic product) of 29.5 percent would require a substantial reduction. Meanwhile, the corporate tax system here is so poorly designed that, despite the high rates, the U.S. collects less in corporate taxes as a percentage of GDP than all but a handful of wealthy nations. The notion that the U.S. needs corporate tax reform, and that this reform should include a big rate cut, garners about the closest thing to unanimous support among experts as one can find in this uncertain, disputatious world. Then there's the question of who actually pays corporate taxes, with some economists arguing that, because capital is mobile and labor for the most part is not, it falls mainly on workers.
But these are all the views of the elite, the "managerial caste out of touch with the real world," the people President Trump has made so much political hay out of berating and confounding. Among nonexperts, there appear to be few subscribers in the U.S. to the notion that corporate taxes are too high:
Only 39 percent of Trump voters believe corporate taxes should be cut, compared with 22 percent of the general public.
Now, unlike in Switzerland, a U.S. corporate tax reform wouldn't be subject to a direct voter referendum. Also, a corporate tax reform plan that cut rates wouldn't necessarily reduce the amount of taxes paid by corporations 1 -- although good luck explaining that when you're running for re-election.
The overall message here for elected officials would seem to be: Tread warily when cutting corporate tax rates. Sure enough, elected officials in the U.S. have tread quite warily since rates topped out in the early 1950s. Since then there have been several small reductions in the top marginal corporate rate, but only one big one:
That big cut, to 34 percent from 46 percent, was a result of the blockbuster Tax Reform Act of 1986, the product of an unlikely alliance of Treasury Department bureaucrats, Republican Representative Jack Kemp and Democratic Senator Bill Bradley, with halfhearted but nonetheless quite helpful nudges here and there from President Ronald Reagan. There's a wonderful book about the whole process, "Showdown at Gucci Gulch" by Jeffrey Birnbaum and Alan Murray, that makes clear just how improbable it all was.
Gary Cohn -- until recently the president of Goldman Sachs Group Inc. -- and a bevy of congressional Republicans, business leaders and tax wonks seem to believe that the time has come for another improbable tax-reform triumph. Maybe they're right. Maybe the fact that they have Donald Trump in person to help them combat the Trump-Effekt will prove a blessing. Still, it isn't going to be easy, and there could be some unwelcome political aftereffects. Just ask the Swiss.
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
Both because most proposals for corporate tax reform include various attempts at base broadening and loophole tightening, and also because of the possibility (probably remote, but worth mentioning) that the U.S. corporate tax rate is on the wrong side of the Laffer curve.
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