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Republican Tax Measure Would Have A Big Impact On U.S. Corporations

DAVID GREENE, HOST:

Republicans are hoping to vote on a tax bill. They hope to get it to President Trump's desk and then celebrate their first big legislative win. This would give big corporations reason to celebrate as well. Corporate tax rates are going to drop, and supporters of this bill say companies will use some of the extra money, at least, to raise wages and create jobs, helping to lift up the economy. So how safe is that assumption? Well, Jennifer Blouin is an accounting professor at the Wharton School of Business, and she is with us.

Let me ask you the broad question. I mean, we have this big corporate tax cut from 35 to 21 percent. Is there a clear sense of what companies do when they have that kind of extra money?

JENNIFER BLOUIN: There's a whole lot of really smart economists that have been working on this question for about 70 years, and I think the sort of average response is, yes, that something will happen. How much and how big of a response - just don't know.

GREENE: So this gets to the central political debate that's been going on between conservatives and people on the left for a very long time.

BLOUIN: Exactly.

GREENE: There is no clear answer. Well, are there - is there any case study that you can point to that might give us some sort of hint at what the behavior might be?

BLOUIN: Well, I've studied the response to the 2004 American Jobs Creation Act, which created a truly one-time-only tax holiday where we reduced the tax rate on multinationals' overseas income. And so what we have in this current legislation is - a piece of it is a deemed repatriation, which looks very similar to what happened in 2004.

GREENE: This was under George W. Bush. It was a brief holiday where companies could bring back money into the U.S. and have very low taxes on that money.

BLOUIN: Exactly right. And so that's what we saw is upwards of about $350, $360 billion was repatriated back into the United States. And what we studied was, what did firms ultimately do with that cash? And it turns out, at the margin, they spent the bulk of it repurchasing their own stock. Some evidence suggests they've distributed cash in the form of dividends to shareholders, and then they paid down domestic debt.

GREENE: That doesn't sound like dramatically creating jobs and raising wages that some Republicans have been arguing.

BLOUIN: No. And but part of what this deemed repatriation - of this repatriation - right - this is changing the tax rate on past income. It's not really changing the tax rate on future income, which is what you need to do in order to incentivize this jobs creation and domestic investment.

GREENE: So the 2017 tax cut that we're seeing right now - that is mostly on past income, and it's not so simple as saying that this will help companies in future years, you know, supercharge the economy.

BLOUIN: Exactly. So what we - also, in the 2004 act, this was a company's choice. They got to look at their overseas profits, look at their liquidity, and the rules say you had to essentially pay a cash dividend from your foreign business into the United States. What we see now in the 2017 bill is, this is a deemed repatriation. This isn't just looking at cash, and it's not giving multinational companies a choice. It's saying, let's look at your pool of overseas income. And your income - some companies take it and hold in cash, and some companies take it, invest in buildings.

But the tax act - what it says is, all of that is going to be deemed repatriated, subject to tax. But it's not as if we're going to see that $3 trillion come back in because the companies didn't choose to - what to do. So for those firms that have the liquidity, I anticipate we will see a similar response and that there will be this new liquidity that will flow back into United States, where companies will essentially buy back more shares.

GREENE: OK, so I just want to be really careful here. You say that the record, broadly, is unclear. Do the Republicans have some kind of argument, if they point into history, in some cases where cutting corporate taxes can help stimulate the economy?

BLOUIN: Absolutely. There - it doesn't seem that it does harm. But the argument here is, how much growth is going to be created by this? And what we want is a lot of growth so that this tax bill doesn't create a massive deficit. So that's where the fight's been. The trouble is in - with history is, how do you measure what the response rate of the economy is to a change-in-tax-rates day when a whole host of other things go on in what we call the macro level? So oil prices change, and interest rates fluctuate. All of this is tied together, and that's what it makes so - it makes it so difficult to actually pinpoint the response and growth to a specific tax change.

GREENE: Jennifer Blouin is an accounting professor at the University of Pennsylvania's Wharton School of Business. Thanks a lot. We appreciate it.

BLOUIN: Take care. Thank you. Transcript provided by NPR, Copyright NPR.