Frequently Asked Questions
Q: What is Shared Economic Growth?
A: Shared Economic Growth is a tax reform proposal that attracts investment and jobs to the U.S. economy and enables the U.S. and working Americans to compete in a global economy. Through a dividends paid deduction, corporations earn a tax benefit only if they pay out their earnings as dividends and the foregone tax revenues on those corporate earnings are offset by eliminating the special tax rates for capital gains and dividend income of the individual recipients. When corporate earnings are taxed once and only once at the individual level, a number of inefficient economic distortions are eliminated, the most important one being that lower income individuals currently pay too much tax due on their earnings and invested retirement savings due to the hidden corporate income tax while high income individuals, on average, effectively pay tax at lower rates. As explained in further detail under “Middle Class Market Power”, reducing the corporate level tax is far more effective at encouraging investmentin the US economy and generating broad-based growth for the benefit of all Americans than special capital gains and dividend rates for investment at the individual level.
Q: Why has the income of the great majority of Americans been stagnant for three decades?
A: In a global economy where capital investment and jobs are highly mobile but workers are not, domestic workers are bearing the bulk of the corporate income tax burden in the form of limited job opportunities, lower wages and reduced return on their savings. In fact, recent estimates suggest that approximately 70% of the corporate income tax actually falls on domestic workers. Through the corporation, shareholders can effectively escape the corporate income tax burden by simply allocating or reallocating their investment to lower tax locations abroad. Only operations that cannot be moved at a reasonable cost remain here to suffer the burden of the tax. In consequence, demand for U.S. employees drops, which undermines their bargaining power. By encouraging foreign investment over U.S. investment, the corporate income tax is effectively exporting good jobs and subsidizing foreign workers at the expense of Americans wage earners. This is why the great majority of Americans who rely upon wages rather than capital as their primary source of income have experienced income stagnation and have failed to benefit from the growth in the U.S. economy over the past three decades. As described in "Middle Class Market Power", the corporate income tax has become a ball and chain secured to the ankle of every working American. This is the last thing Americans need as they confront fierce global competition from low wage countries abroad.
Q: How does Shared Economic Growth improve retirement security of Americans?
A: As described in “Our Children’s Inheritance”, our social safety nets are simply not safe. Shared Economic Growth would address the Social Security problem on two fronts. By boosting the U.S. economy overall, the proposal would provide the revenue base the U.S. government needs to keep its promises. By increasingup to 54% the returns that workers would earn on their IRAs and on other pension savings accounts, Shared Economic Growth would provide individuals more incentive to save and faster growth on their savings. At a 5% after-tax rate of return on savings, it takes roughly 15½ years for one dollar to double. Boost that rate of return by 54%, and that same dollar will double in 10½ years. That increase would greatly boost the financial independence of working-saving Americans, helping them to avoid dependence on the Federal government, without implementing any hokey schemes to shift money out of Social Security and into private investment accounts. Some 27% of U.S. corporate shares are held by public and private pension funds. Removing the hidden 35% tax on the earnings of these funds would make a huge difference in people's retirement savings. Since the government has spent all of the money that it was supposed to save for your retirement, the least it can do is to let you keep the earnings on the pension money you save yourself. Increased return on savings and investment, particularly in tax advantaged retirement vehicles, would boost private savings and provide individuals with the means to ensure their own security without having to entrust that responsibility to the government. This provides the best hope for a safe retirement.
Q: How does Shared Economic Growth address the excessive foreign debt of the U.S.?
A: As described in “Our Children’s Inheritance”, America cannot be free if her economy is held hostage by foreign lenders. Shared Economic Growth would make America the investment location of choice, so both U.S. and foreign companies would bring cash here, hire Americans and boost the growth of our economy. It would help to improve U.S. innovation both by encouraging companies to place their research and development efforts here and by making investment capital readily available to innovators with good ideas. By increasing our economic growth and efficiency, the proposal would give our economy strength and stability, improve our balance of trade, strengthen our tax base, and allow America to end its dependence on foreign lenders.
Q: How does Shared Economic Growth restore our technical edge?
A: As described in “Our Children’s Inheritance”, Corporations wishing to set up their R&D centers and high tech operations in tax friendly environments are no longer forced to stay in America to access our talent - they can buy equivalent talent abroad. The Shared Economic Growth proposal addresses this problem by reversing the incentives for corporations to move their R&D and high value, high skill, high technology operations into foreign countries. By eliminating the perverse system in which corporations earn up to 54% more simply by moving their high value operations abroad, America can pull technology development back home, preserving our technical edge and the kinds of good jobs that we want and need to foster.
Q: Will Shared Economic Growth prevent the flow of jobs to low wage locations abroad?
A: Low-margin, low-skill, low-productivity operations will continue to migrate to low-wage locations. Differences in the cost of labor, not taxes, determine where these jobs are performed, for the most part. The U.S. cannot and should not compete on the basis of cheap unskilled labor. But the U.S. can and should compete to attract high-growth, knowledge-based economic activity that generates good jobs – high-margin, high-skill, high-productivity work. Such knowledge-based economic activity is naturally tax sensitive because it is both high-margin and especially mobile due to the advances in communication and information technologies and the availability of highly skilled labor abroad. By effectively eliminating the corporate income tax, Shared Economic Growth will attract such investment and jobs to the U.S. and generate broad based economic growth that increases the productivity, wages and standard of living of all Americans. Under Shared Economic Growth, the U.S. economy and American wage earners can prosper in spite of competitive pressure from low wage countries.
Q: Why reduce the corporate income tax rate to zero instead of the norm of about 25-27%?
A: Many countries have significantly reduced corporate tax rates and created incentives to attract investment, particularly in high-margin knowledge based economic activities, and these reforms have been remarkably successful. For example, between 1993 and 2003, Ireland gradually cut its corporate tax rate from 40% to 12.5%. Driven by a significant increase in foreign investment, Ireland generated double-digit GDP growth in the mid-late 1990s and GDP growth has averaged roughly 5% a year since then. (That is better than the U.S. or any of the other original 15 EU member states.) And Ireland’s GDP per capita and wages are now higher than most EU countries and the U.S. Likewise, Switzerland and Singapore have low corporate tax rates and they offer special tax incentives and tax holidays (tax free periods from 5-15 years) for companies that undertake certain high-level entrepreneurial activities such as research and development or invest in high-tech capital intensive businesses. Switzerland now boasts very high levels of educational attainment and technological innovation both of which have made it one of the most productive economies in the world. Singapore has also consistently enjoyed high productivity rates and healthy demand for labor so the wages and standard of living of its people have increased to levels comparable to advanced economies in Europe. Spain, on the other hand, has maintained its corporate income tax rate at 35% for many years. The Spanish economy suffers from relatively low productivity levels (GDP per capita is approximately half that of countries such as Ireland and Switzerland), low wages and high unemployment. With high corporate tax rates, Spain has been unable to attract the capital investment and demand for labor that has generated high productivity and high wages in Ireland, Switzerland and Singapore.
As these examples illustrate, international experience shows that lowering corporate tax rates is the best way to develop a growing knowledge based economy and attract good jobs. The more we reduce the corporate tax rate to attract high value investment, the more we generate growth and the more the “price” for U.S. labor is bid up by demand. This is why the ideal rate is zero. Given that some countries, including advanced economies with highly skilled labor, already offer zero corporate tax rates, any corporate tax above zero effectively exports some investment and jobs abroad. Of course, a significant reduction in the corporate tax rate (though not to zero) through a dividends paid deduction of less than 100% would still greatly boost the U.S. economy and generate broad based growth for the benefit of all Americans. It is just not optimal and corporations would be slower to respond to just a percentage reduction because they would expect the percentage to drift back up again over the 20+ year life of a factory.
Q: Is Shared Economic Growth simply another tax break for corporations?
A: The Shared Economic Growth proposal would require any company seeking to get the benefit of the dividends paid deduction to pay its taxable earnings, in cash, to its shareholders. So while the proposal would relieve corporations of the burden of the 35% corporate tax on a dollar of income, to obtain that benefit the corporation needs to pay the dollar out to its shareholders. The corporation, then, needs to "give up" a dollar to get 35 cents. By distributing its earnings, including earnings generated abroad, corporations must continuously justify and compete for re-investment from shareholders. It would be impossible to hide behind complex accounting or confusing jargon – either a company would have the money, or it wouldn’t. And if a company wanted more cash to invest, then it would need to convince the public to buy new stock. If it hadn’t responded to previous investor demands to “show me the money,” a corporation would need to do some serious explaining to persuade anyone to invest their hard-earned cash in it. As a result, the ability of shareholders to evaluate the financial health of a corporation and ensure that corporate investments maximize shareholder value is greatly enhanced. Shared Economic Growth is not a give away to corporations. When corporations have to “show me the money” they become accountable to shareholders in a very meaningful way.
As described in “Middle Class Market Power”, the primary beneficiaries of the elimination of the corporate tax are working Americans who currently bear the bulk of the corporate income tax burden in the form of limited job opportunities, reduced wages and lower returns on their retirement savings. Working Americans would be relieved of this burden because corporations would have to earn the tax incentive by responsibly investing in the U.S. economy – investment that will increase the productivity, wages and standard of living of Americans.