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Last week, I described how, in the short run, foreign investors would receive 35 percent of the benefits of the lower corporate income tax rates proposed by the Trump Administration and congressional Republican leaders (the Big Six). But their windfall could be especially generous because increases in asset values produced by the corporate rate cut would largely be tax-free to foreign investors at the shareholder level. By comparison, US individuals generally would be subject to a 23.8 percent shareholder-level tax on their long term capital gains or dividends received.
The Tax Policy Center estimates the revenue loss from lowering the top corporate income tax rate from 35 percent to 20 percent at approximately $200 billion a year, or $2 trillion over 10 years. Economists generally agree that shareholders are the short-run beneficiaries of corporate tax cuts, though there is disagreement about how much they’d benefit in the longer run. According to my estimates, in the short run, about 35 percent of the tax cut would benefit foreign investors, both portfolio investors and multinational corporations, because they own 35 percent of US corporate stock. The balance would benefit US investors, which include individuals, tax-free retirement plans, and nonprofit institutions. In prior work, I estimated that about one-quarter of all publicly-owned shares are held by US taxable individuals.
Remember, the Big Six plan would cut income tax rates for US corporations, providing a windfall to existing investors, including foreigners, for investments they have already made. But the windfall also would occur through a process known as “capitalization,” where corporate equity prices rise to reflect an anticipated increase in after-tax profits. This process, to some extent, may already be reflected in higher stock prices. Indeed, Treasury Secretary Steven Mnuchin has warned that our stock market will fall, if Congress fails to enact the proposed tax cuts.
Thus, if the US lowers its corporate tax rate from 35 to 20 percent, corporations would avoid $2 trillion of taxes over the course of the 10-year budget window, which, to a large degree, should be reflected in higher stock prices. We cannot predict with certainty how long the benefits from the corporate rate cut would accrue entirely to shareholders. However, if the 10-year tax savings are fully reflected in share prices, foreign investors would see about $700 billion from the added appreciation of their US stocks and US investors would enjoy the remaining $1.3 trillion. (Of course, the shareholder benefit may shrink some over the first 10 years, but also may continue some after the 10 years).
Some investors may cash out relatively quickly by selling their stock (perhaps in a corporate buyback). However, foreign taxpayers’ gains from the sale of personal property held for investment generally are free of US tax. By comparison, US individuals generally are taxed at 23.8 percent (the 20 percent long-term capital gains rate, plus the Affordable Care Act’s 3.8 percent tax on net investment income for high income households).
Those foreign investors who retain their US stock may pay tax on higher dividends in the future, although foreigners often avoid stocks with high dividends. In addition, the 30 percent statutory tax rate on dividends to foreigners generally is reduced by treaty, to 15 percent for dividends on portfolio holdings and 5 percent (or zero) for dividends paid from affiliated US corporations to their foreign parents. By comparison, US individuals generally pay 23.8 percent tax on their dividends (the same rate as long-term capital gains).
In sum, foreign investors would not only reap 35 percent of the benefits of the Big Six’s corporate rate cut, they’d largely do so without even paying US taxes on their gains.
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J. Scott Applewhite/AP Photo