The USA’s Presidential Race to the Bottom?

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Written by Sara Sindija

Monday, September 26th was the first US Presidential debate of the 2016 election season.  Hillary Clinton and Donald Trump took the stage, dueling over important topics ranging from race issues in America to terrorism and the threat of ISIS.  However, it was the issue of taxes that fired up the candidates. When Trump was accused of not paying federal taxes, he quipped, “that makes me smart”. This suggests of course, that the US tax policies for the country’s top earners, are not.  Most LSE students have not yet had the pleasure to personally delve into understanding the corporate tax structure.

Below is a beginners guide to understanding who stands where, and what it all means. By debunking myths, explaining facts, and comparing the American discourse in the context of Brexit, below is what we were able to conclude.

For companies moving their main operations overseas, an exit tax is something everyone can agree on. Though information is not available on Trump’s official tax plan, he expressed once again on Monday night that he was firmly in favor of taxing companies who choose to leave the US to conduct business more cheaply elsewhere. Clinton hopes to close tax loopholes like inversions that reward companies for shifting profits and jobs overseas. Tax loopholes reduce the taxes paid by multinational corporations, while smaller firms are often taxed 20 times higher. Meanwhile, Trump hopes to lower corporate taxes from 35 percent to a mere 15 percent.

Lower corporate tax rates would not foster repatriation and incentivize multinational corporations to stay local. This summer, in a post-Brexit frenzy, former MP, George Osborne, announced that the UK would remain desirable in the world economy by cutting corporate taxes to less than 15 percent– the lowest rate of any major economy. The concern is two-fold.  First, repatriations don’t typically lead to an increase in domestic investment and employment.  In fact, in an internal memo from the head of tax at the OECD voiced concerns that the UK would become a tax haven economy. Secondly, the world’s largest multinational corporations such as Apple, Starbucks, and Pfizer, maintain a worldwide network of tax havens to park global profits, some of which don’t even have any employees.

Lowering corporate taxes does not inherently equate to more jobs. It is no secret that widening inequality is a deeply concerning issue in the US and Britain. During Monday’s debate, Trump announced that with lower tax rates for big companies, “the wealthy are going to create tremendous jobs. They’re going to expand their companies. It’s a great thing for the middle class when companies expand”. What Trump has described is the theory of trickle-down economics. Ha-Joon Chang, faculty of Economics at the University of Cambridge recently explained that “once you realize trickle-down economics does not work, you will see the excessive tax cuts for the rich for what they are—a simple upward redistribution of income.” In reality, the only incentive for companies to expand is if consumers want to buy more products! With a shrinking middle class, consumers cannot afford more goods and services.  Instead, any extra capital will continue to be used as it often has been historically: for companies to buy back their own stock, raise dividends, and increase executive salaries, rather than investing in expansion.

With growing inequality in the US and Britain, raising working and middle-class wages will improve the economy more than lowering corporate taxes.  Simply put, reduced corporate taxes reduce government revenue and broaden the deficit.  All things held equal, one of two things could happen; either the deficit is deepened, or a larger portion of government expenditures must come from elsewhere.  The likely source is the middle class.

A prudent corporate tax policy is not only critical for the US economy, but is extremely important to the success of a post-Brexit economy for Britain. Corporate tax regulations certainly need reform, but not in the way Trump and Osborne envision that reform. Large corporations’ should not receive economic advantages over small, domestic businesses. The current US tax system benefits the wealthy and burdens the middle class, exacerbating the endemic of widening inequality. Unfortunately, the future of the economy lies in the hands of those least affected. History and economics tell us that when the middle class does well, so does the economy. To implement policies that further diminish the middle class continues the US and Great Britain on a course of deepening economic divides and increased national deficit.  

Ramone Bedi

Deputy Editor for the City