Corporate Tax Cut Seen as $70 Billion Gift to Foreign Investors

(Bloomberg) — President Donald Trump says middle-class Americans will see higher wages from his proposed corporate tax cuts, but a new study shows that foreign holders of U.S. stock would actually see a bigger benefit in the short term.

The framework released last month by the White House and GOP leaders calls for cutting the corporate tax rate to 20 percent from 35 percent — to provide U.S. companies estimated annual tax savings of roughly $200 billion. Since foreign investors hold more than one third of U.S. stocks, slashing the rate would hand them about $70 billion a year, according to Steven Rosenthal, a senior fellow at the Urban-Brookings Tax Policy Center.

Preliminary estimates show that middle-class households would only get an annual boost of $23 billion in the short term under the tax framework, Rosenthal wrote in the trade publication Tax Notes.

Trump has vowed that middle-class Americans would be the main beneficiaries under his tax plan, but the framework’s limited details have led to estimates that top earners would reap the biggest gains. The White House has pushed back on those reports, saying its plan to cut the corporate tax rate would increase average household income by at least $4,000 over time.

Natalie Strom, a spokeswoman for the White House, declined to comment on the study.

Economists debate how much workers actually benefit over time from a corporate rate cut. Some say that workers bear anywhere from 19 percent to 25 percent of the corporate tax, in the form of lower wages, over the long term. Treasury Secretary Steven Mnuchin has countered that, arguing that workers bear 70 percent of the corporate tax.

There’s more agreement that over the short term, or fewer than 10 years by some estimates, the benefit of a corporate rate cut goes mostly to shareholders. That’s in part because it takes time for businesses to adjust any investment decisions that might lead to expansion and hiring.

Rosenthal, a tax lawyer for more than two decades and a former legislation counsel with the congressional Joint Committee on Taxation, calculated the $70 billion figure by using a prior TPC analysis that shows cutting the corporate rate to 20 percent would reduce corporate taxes on average by $200 billion a year, or $2 trillion over a decade. “The windfall to foreigners” by lowering the corporate rate to 20 percent “is exceptionally large,” Rosenthal wrote.

Scott Greenberg, an economist at the conservative Tax Foundation, called Rosenthal’s basic claims “essentially correct.” He added that while it’s true that shareholders — whether domestic or foreign — would benefit from a corporate rate cut in the short-term, over the long term, “more investment in the U.S. means more jobs for workers, even if it comes from foreigners.”

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