President Donald Trump makes a statement to the media Tom Williams/Getty Images

Cutting US Corporate Tax Is Worth the Cost

One of the main criticisms leveled at congressional Republicans' proposal to cut corporate taxes is that a higher budget deficit would amount to an undesirable fiscal stimulus. But with monetary policy turning contractionary, and most experts predicting a US recession in the next five years, stimulus should be welcomed.

CAMBRIDGE – The United States Congress is close to enacting a major tax reform. The plan’s most important provision reduces the corporate tax rate from 35% to 20% – from the highest among all OECD countries to one of the lowest – and allows US companies to repatriate the profits of their foreign subsidiaries without paying additional US taxes. Opponents of the legislation point to the resulting increase in the federal budget deficit, which will add $1.5 trillion to the government debt over the next ten years.

I dislike budget deficits, and I have long warned about their dangerous effects. Nonetheless, I believe that the economic benefits resulting from the corporate tax changes will outweigh the adverse effects of the increased debt.

The lower rate will attract capital to the US corporate sector. American corporations will invest more in the US, because foreign countries will no longer offer lower tax rates, and will repatriate profits earned by their foreign subsidiaries rather than leaving them abroad. They will also bring back some of the previously earned foreign profits that have been left outside the US, estimated by the Treasury to be worth $2.5 trillion. Foreign companies will expand their investments in the US – or even shift their operations there – to take advantage of the lower tax rate. And within the US, capital will flow from agriculture and housing to higher productivity uses in the corporate sector.

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