Trust but verify, this Russian proverb made famous in America by Ronald Reagan after signing the intermediate-nuclear range forces treaty is sage advice not just for nuclear arms reduction treaties but corporate tax reform.
House Republicans and President Trump posit that if we lower the corporate tax rate it will result in greater job growth, higher wages, increased business investment and stronger economic growth. While some companies will increase hiring, raise wages and increase business investment, not all companies will.
{mosads}Some companies will reduce employment, send more jobs overseas and decrease business investment because of factors other than corporate tax rates. Maybe they lost a key customer, their stock price was sinking, they merged with another company or they lost patent protection on a key pharmaceutical.
There are many factors outside of the corporate tax rate that impact company hiring and investment decisions. It is simplistic to assume that all companies will make hiring and investment decisions based solely on corporate tax rates. The last 30 years prove this.
From 1986 to 2016, the top statutory corporate tax rate declined from 46 percent to 35 percent. More importantly, the effective corporate tax rate, the rate paid by corporations after deductions, declined from 31.5 percent in 1986 to 18.6 percent in 2016.
During the same period, employment growth trended downward as well. While the late 1980s economic recovery saw employment growth average 2.1 percent, employment growth during the most recent recovery has averaged 1.6 percent, a sizable decline.
Nonresidential business investment also did not see a significant uptick. Instead, making an exception for the 1990s economic expansion, business investment remained flat to slightly slower.
Business investment as a percentage of GDP during the late 80s economic expansion averaged 12.8 percent while business investment during the most recent recovery has averaged 12.3 percent.
Cleary, lowering corporate tax rates further and simply trusting employment growth will increase, GDP growth will accelerate and business investment will expand at a faster pace is naïve given recent history.
If Congress want to try stimulating employment and economic growth by reducing corporate tax rates, it needs to take a page from former President Reagan’s approach to nuclear arms reduction: Trust, but verify.
A corporate tax scorecard would provide a simple means to verify the employment and economic gains promised are received. It would determine each company’s tax rate based on three metrics:
First, companies that increase American employment would receive a tax cut while those that don’t won’t. Second, companies paying higher wages than industry peers would pay a lower tax rate. Third, companies maintaining a higher percentage of employees in the U.S. would pay a lower tax rate.
These three scores would be used to determine each company’s corporate tax rate. This would ensure that corporate tax cuts go to companies fulfilling the promise of greater employment and wage growth.
Ronald Reagan was willing to negotiate with the Soviet Union, an endeavor that some deemed naïve. However, he didn’t just trust the Soviet Union, he ensured compliance through verification.
Rather than cutting corporate tax rates and trusting it will result in increasing hiring and wages, Congress and President Trump can take a page from former President Reagan.
They can attempt to both stimulate employment and wage growth while ensuring corporate tax rates are reduced only for companies following through on the promise of more jobs, higher wages and greater American employment. Trust but verify.
Chris Macke is the founder of Solutionomics, a think tank that is focused on developing solutions and recommendations for a more efficient, merit-based corporate tax code; replacing damaging global trade myths and policies and maintaining a financial system that provides a stable source of capital for consumers and businesses.