Corporate Tax Cuts Seen Shifting Paper Profits, Not Factories

(Bloomberg) -- Corporate tax rates are falling around the world. Inequality expert Gabriel Zucman questions the conventional wisdom that they will goose investment and economic growth.

To him, it may be more about reshuffling which governments fill their coffers.

“Machines don’t move to low-tax places; paper profits do,” the University of California at Berkeley economist and his co-authors Thomas Tørsløv and Ludvig Wier write in a National Bureau of Economic Research working paper out this week.

Zucman -- who wrote “The Hidden Wealth of Nations” and has co-authored work with French economist Thomas Piketty -- estimates that 40 percent of multinational profits were shifted to overseas havens in 2015. He and his fellow authors posit that business tax cuts across the globe are an attempt to lure those paper profits.

Between 1985 and 2018, the global average corporate tax rate has fallen to 24 percent from 49 percent, they point out. Recently and notably, President Donald Trump’s tax plan slashed the U.S. corporate tax rate to 21 percent from 35 percent.

“Cutting corporate tax rates, as the United States did at the end of 2017, is less likely to generate quick positive effects on wages than textbook economic models suggest,” Zucman and his colleagues wrote.

If factories and machines moved back to U.S. shores from abroad thanks to newly attractive tax rates, that could boost economic activity and efficiency, and ultimately wages. “Much less so if paper profits -- not productive capital -- is what moves across countries," according to the paper.

Trump’s economic advisers have said the corporate tax cut alone would bring benefits to individuals -- boosting average household income by at least $4,000 over the long run. Other economists have questioned that assessment.

Corporate Tax Cuts Seen Shifting Paper Profits, Not Factories

You can read the paper here, but a few key points:

  • We’re understating gross domestic product, corporate profits and the rise of the corporate capital share in non-haven countries because so much profit is being shifted overseas. The magnitude is big: The U.S. capital share is 27 percent counting for profit shifting up 1.1 percent, and the U.K.’s is 31 percent, up 2.5 percent.
  • Most high-tax country enforcement efforts are aimed at other high-tax nations. “In effect, non-haven countries steal revenue from each other while letting tax havens flourish." Why? Data on tax haven countries is hard to come by, companies spend a lot of money to defend their shift to low-tax locales, and there’s less cooperation between tax haven nations and non-havens.
  • Given these findings, it’s possible that policy efforts aimed at cutting tax avoidance could make it worse. The Organization for Economic Cooperation and Development is trying to improve dispute revolution mechanisms, but “the easier it is for, say, the French tax authority to relocate profits booked in Germany, the less resources it will devote to chasing the profits shifted to Bermuda -- increasing shifting to low-tax locales.”

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