You do remember the prediction in my last post don’t you? That Congress will reduce the corporate income tax from 35% to 20% in 2018…? Well when that happens non-US investors should jump for joy. Follow my logic for a moment.
It’s fairly non-controversial to say that the short-term benefit of a corporate tax rate cut is enjoyed by shareholders of the very corporations whose tax rates are cut. You know, because those corporations will have more money to distribute (remember dividends?) or at least because corporations will enjoy higher earnings, which should increase their stock value. So it stands to reason that we should consider exactly who owns shares of the corporations that will be enjoying these tax cuts? Foreign shareholders? Yes, you guessed it, although I’ll refer to “them” as non-US persons so as to not offend.
Of course plenty of US persons own shares of US corporations—individuals, pension funds, non-profit institutions, etc. But non-US persons account for 35% of US stock holdings.[i] If you calculate the cost to the US Treasury of a corporate tax rate cut, and multiply that by the percentage of non-US shareholders holding shares of US corporations you should have an idea of the economic benefit that is “making foreign investors great again,” n’est’pas?
Let’s do the math. Cutting the corporate income tax rate from 35% to 20% will result in $2 Trillion less revenue for the US Treasury over the next 10 years[ii]. The cost of such a tax cut borne by US taxpayers, therefore, will result in an immediate benefit to the shareholders of those corporations, 35% of whom are non-US persons. Is it controversial to say, then, that $700 billion (35% x $2 Trillion) of the cost of such tax cuts would benefit non-US shareholders?
I can hear you yelling back at me about how the long-term benefits of a corporate income tax rate cut actually benefit more of the larger economy, result in higher wages, etc., etc. etc. Ok fair enough, but if the amount isn’t $700 billion, some amount of the cost of the corporate income tax rate cut will benefit wealthy, non-US investors. And while I really don’t have a problem with a corporate income tax rate cut two points arise from this discussion: 1. This fact should be considered as part of the national discussion about the extent to which we want to further increase our national budget deficit, and 2. If I were a wealthy non-US investor I’d be thinking about investing even more money in the US stock market right about now.
[i] “Slashing Corporate Taxes: Foreign Investors are Surprise Winners”, Steven M. Rosenthal, Oct. 23, 2017 post in Tax Notes. [ii] “Preliminary Analysis of the Unified Framework,” Tax Policy Center, Sept. 29, 2017.