- The GOP tax reform plan has been sold as a cut for the middle class.
- A new study shows that foreign investors could end up benefitting much more from the tax cuts than America’s middle class.
The tax plan proposed by President Donald Trump and Republican leaders is touted as a “middle class tax cut” and Trump has repeatedly framed the policy as designed with the average American in mind.
“The tax cuts and reforms of the 1980s show that when we empower the American people to pursue their dreams, they will not only achieve greatness and create prosperity beyond imagination, they will build an entirely new world,” Trump wrote in an op-ed for USA Today on Sunday. “It is time to ignite America’s middle class miracle once again.”
According to a new study, however, foreign investors could end up being bigger beneficiaries from the GOP’s tax reform plan than America’s middle class.
Steven Rosenthal, a senior fellow at the Urban-Brookings Tax Policy Center, estimated the potential financial benefit for foreign holders of US-domiciled companies’ stock in the first year under Trump’s tax proposal and compared it to the estimated benefit for middle-class Americans, those households making between the 40th and 60th percentile of incomes.
“I estimate that foreign investors own about 35 per cent of U.S. corporate stock and thus would receive about 35 per cent of the short-run benefit,” Rosenthal wrote in the study, released Monday. “This translates to approximately $US70 billion a year, about three times the $US23 billion that all middle-income households would see under the preliminary estimates of the Big Six tax plan.”
Foreign investors own a significant amount of US stocks, according to Rosenthal, and asset prices like stocks are expected to increase following a tax cuts as profits increase. Shaving the corporate tax rate to 20%, as Trump’s plan proposes, from the current 35% federal rate would decrease costs and boost firms’ profitability.
Since stock prices are predicated in large part in expectations of future profits, larger corporate incomes would boost stock prices and in turn benefit the foreign investors.
The study estimates that foreign investors own roughly 35% of the US stock market, either through direct investment (Rosenthal uses the example of “Apple stock held by a Canadian”) or indirectly (the researcher uses the example of “Siemens USA, which is wholly owned by Siemens AG, a German multinational”).
Given that, a chunk of the benefit from the corporate tax cut will inevitably find it’s way to foreign asset holders via higher stock prices as profits increase, and the size of the benefit is enormous. From Rosenthal’s study:
“Given that 35 per cent of all shares are held by foreign investors, and given that all the short-run benefit of lowering the corporate tax rate are assigned to shareholders of U.S. corporations, I conclude that 35 per cent of the approximately $US200 billion in annual corporate tax savings in the first years after the proposal comes into effect would accrue to foreign investors. This amounts to $US70 billion a year.”
Additionally, the analysis does not take into account other possible benefits like the repatriation tax.
As Rosenthal notes, the $US70 billion windfall from the lowering of the corporate tax rate would be a bigger boon to foreign investors than the total benefit from all of the proposed changes in the tax plan for middle income Americans.
“All the individual and business tax cuts in the Big Six tax plan, as currently described, would benefit middle-income U.S. households (those in the 40th to 60th income percentile) by only $US23 billion in the first year,” according to Rosenthal.