patrick.net

When President Trump was elected, Paul Krugman wrote, “[I]f the question is when the markets will recover, a first-pass answer is never.”

Still, despite Trump’s critics on tax policy and Chinese tariffs and to the surprise of many in the establishment, the markets are doing just fine. Several days ago, the Dow Jones Index gained its 10,000th point since Trump was elected.

That index, which is made up of a handful of larger U.S. companies, is now over 28,000 points. A more accurate measure of market performance, the S&P 500 Index, is up more than 45 percent since Trump’s election Nov. 8, 2016.

Clearly, Krugman was wrong. One reason is that the Trump administration oversaw a tax reform package that cut U.S. corporate tax rates from 35 percent to 21 percent. Democrats smear Trump for cutting taxes to corporations, but during the Obama administration, there was bipartisan agreement that the U.S. corporate tax was too high — it’s just that nobody did anything about it.

The 35 percent rate, not even counting the extra taxes states tack on, was extremely uncompetitive internationally, including compared to France (about 30 percent), the United Kingdom (about 20 percent), and South Korea’s 22 percent tax at the time. Because of the higher tax in America, companies such as Medtronic took off to Ireland, which had a corporate tax rate of 12.5 percent.

Worse, the corporate tax was extremely unfair to companies that did all their business in America. The corporate tax of 35 percent was applied globally, but companies only owed the tax if they moved their cash to America. So companies with huge multinational operations used accounting tricks to book profits in foreign countries such as low-tax Ireland, while booking losses and other tax benefits in the United States. This needlessly cost the United States tax revenue.

Companies like General Electric paid next-to-nothing for years, while companies like UPS — which does most of its business in the United States — paid the full 35 percent.

Trump’s corporate tax reform didn’t fix all of this disparity, but it fixed much of it. And because the tax on the global profits of U.S. companies was repealed, companies now have a big incentive to move to the United States $1 trillion and counting that had been sitting overseas. Most important, tax reform increased the return on capital of money invested in America, which should lead to more production and investment in the United States over time.