Grassley on Tax Reform and Impact on Multinational Companies
Feb 11, 2020
Prepared Floor Remarks by U.S. Senator Chuck Grassley of Iowa
Chairman, Senate Finance Committee
Tuesday, February 11, 2020
Since tax reform was enacted in 2017, our economy has grown and strengthened, with American families and businesses seeing real benefits. Unemployment rates have dropped dramatically, with unemployment among Hispanic, Latino and African American workers at record lows.
According to the Bureau of Labor Statistics, average hourly earnings have grown at a rate of 3 percent or higher for 16 consecutive months, with the largest wage gains concentrated in the bottom quarter of the wage scale. In short, lower-income workers are seeing the highest wage growth.
But, instead of looking at the positive economic effects of tax reform, our Democratic colleagues insist that large corporations have received a massive giveaway, and only the wealthy have benefited.
This simply isn’t true.
Tax reform addressed a number of issues that were frequently highlighted by both parties. In particular, tax reform made enormous progress toward creating a more competitive environment for American companies.
Before tax reform, the combined U.S. Federal and state corporate tax rate was the highest in the developed world – 15 percentage points higher than the average of the other 35 countries in the Organization for Economic Cooperation and Development, which is commonly known as the OECD.
Inversions, foreign acquisitions of U.S. companies and the erosion of the U.S. tax base were significant problems. And, with our worldwide tax system, companies were incentivized to store corporate profits in low-tax jurisdictions instead of reinvesting them back in the United States.
Ironically, Democrats highlighted these same issues in the lead up to tax reform. They’re only partisan issues now because tax reform was a Republican effort. But, both sides of the aisle knew that these issues had to be addressed for U.S. companies to remain competitive and for the U.S. economy to continue leading the world.
Critics of tax reform complain that the 21-percent rate is too low. But with the average corporate tax rate of 21.7 percent among the OECD countries today, the United States is finally in line with our peers.
As a result, U.S. companies are more competitive, and investments in the United States are more attractive to both U.S. and foreign companies.
After tax reform, business investment rose by 6.4 percent in 2018. While a weaker global economy, tariffs and other factors subdued growth in 2019, business investment in 2018 and 2019 combined was still $5.7 trillion, hitting record highs.
Capital expenditures of S&P 500 companies have risen by 17 percent since tax reform, and research and development expenditures of S&P 500 companies rose by 18 percent. Hardly the anemic response to tax reform that the critics would have us believe.
Tax reform also changed our international tax rules to remove barriers that previously prevented companies from bringing foreign earnings home.
In the seven quarters since enactment of tax reform, U.S. companies have brought back more than $1 trillion of foreign earnings.
U.S. companies are using these earnings to finance new capital expenditures, increase research and development, increase payrolls, pay down debt and return cash to shareholders and retirement accounts. Companies are putting those earnings to work in this country, not leaving them abroad.
But, we also took care to ensure that companies wouldn’t be able to take advantage of the new U.S. tax system. Tax reform made significant strides to address inversions, foreign takeovers of U.S. companies, and base erosion.
Together, the lower tax rate and new international rules have changed the way that companies structure their business operations.
For example, Assurant, a global insurance company, changed its acquisition agreement so its new parent company remains in the United States. Broadcom, a technology firm, announced it would return its headquarters to the United States after tax reform. Similarly, several energy and pharmaceutical companies that had previously moved out of the United States also made the decision to return, primarily because of tax reform.
Tax reform has leveled the playing field and made the United States a far more attractive place to do business. Hardly the dire consequences that critics would have us believe.
Not to be deterred, the critics continue to look for misleading information to distort the picture.
Most recently, they’ve pointed to CBO projections as evidence that tax reform and recently issued Treasury regulations have provided a windfall to corporations.
I hate to see CBO’s work manipulated to say something it clearly does not.
First and foremost, CBO’s downward adjustment of expected corporate tax receipts does not imply that CBO scores particular Treasury regulations or that a regulation departs from congressional intent.
Rather, CBO’s adjustments broadly reflect significant economic factors and changes in government data.
In particular, CBO adjusted its projections because we now know that Bureau of Economic Analysis estimates of corporate receipts between 2016 and 2018 were overstated. In short, even pre-tax reform projections of corporate profits were too high. So, when that estimate of corporate profits is corrected, it translates to lower tax receipts.
CBO also took into account current economic factors, like recent trade actions and tariffs, the strengthening of the U.S. dollar and the softening of foreign economies, all of which affect expected corporate profits and ultimately tax receipts.
In addition, CBO revised its projections to reflect everything we’re learning about implementation of the new tax rules, including regulatory guidance, new forms and instructions and modeling improvements to better reflect updated economic projections.
And, CBO is only beginning to take into account how U.S. businesses are responding to the new tax rules and Treasury guidance. As many regulations are still being finalized, businesses are only starting to have the needed certainty to invest in new property and equipment, engage in mergers and acquisitions and enter into new business transactions.
CBO’s projections are also based on preliminary data. Tax returns for the first year of the new law were filed less than six months ago. The final data will not be available from the IRS until later this year and even then will still take time to fully analyze.
All of these factors go into CBO’s revised projections of corporate tax receipts, and none of them support the claim that Treasury provided a windfall to corporations. There simply is no basis for the critics’ claim that the revision to CBO’s estimate of corporate receipts means that Treasury has given away the store to big corporations through its regulations.
Despite the critics’ relentless attacks, the benefits of tax reform are proving out. I’m encouraged by the promising economic data that suggests that American workers, families, and businesses are seeing the positive effects. We must continue to promote policies that encourage U.S. businesses to keep operations on American soil, increase wages and reinvest foreign earnings in the United States.
I hope that my Democratic colleagues will stop criticizing the policies that have strengthened our economy, and consider how we can work together to make our tax laws work even better for American businesses and workers.