MIT Sloan Adjunct Associate Professor Zeynep Ton
From Harvard Business Review
Walmart announced today that it is raising its starting wages in the United States from $9 per hour to $11, giving employees one-time cash bonuses of as much as $1,000, and expanding maternity and parental leave benefits as a result of the recently enacted tax reform. It is part of Walmart’s broader effort to create a better experience for its employees and customers. The new tax law creates a major business opportunity for other retailers as well — if their leaders are wise enough to take advantage of it.
The U.S. corporate tax rate is dropping from 35% to 21%. Retailers, many of whom have been paying the full tax rate, are going to benefit substantially. Take a retailer that makes 15% pretax income. Assuming its effective tax rate goes from 35% to 21%, it could save the equivalent of 2.3% of sales. Specialty retailers with higher pretax income will save even more.
Retail executives have a choice in how they use these savings. I believe the smartest choice — one that will help them compete against online retailers like Amazon — is to create a better experience for customers and to achieve operational excellence in stores. For most retailers, doing both requires more investment in store employees — starting with higher wages and more-predictable work schedules. My research shows that combining higher pay for retail employees with a set of smart operational choices that leverage that investment results in more-satisfied customers, employees, and investors. Read More
MIT Sloan Professor Simon Johnson
From Project Syndicate
Donald Trump has finally put out a detailed economic plan. Authored by Peter Navarro (an economist at the University of California-Irvine) and Wilbur Ross (an investor), the plan claims that a President Trump would boost growth and reduce the national debt. But its projections are based on assumptions so unrealistic that they seem to have come from a different planet. If the United States really did adopt Trump’s plan, the result would be an immediate and unmitigated disaster.
At the heart of the plan is a very large tax cut. The authors claim this would boost economic growth, despite the fact that similar cuts in the past (for example, under President George W. Bush) had no such effect. There is a lot of sensible evidence available on precisely this point, all of which is completely ignored.
The Trump plan concedes that the tax cut per se would reduce revenue by at least $2.6 trillion over ten years – and its authors are willing to cite the non-partisan Tax Foundation on this point. But the Trump team claims this would be offset by a growth miracle spurred by deregulation.
MIT Sloan Senior Lecturer Oz Shy
From The Conversation
Last month, the Federal Reserve announced that 31 out of 33 U.S. banks had passed its latest “stress test,” designed to ensure that the largest financial institutions have enough capital to withstand a severe economic shock.
Passing the test amounts to being given a clean bill of health by the Fed. So are taxpayers – who were on the hook for the initial US$700 billion TARP bill to bail out the banks in 2008 – now safe?
Yes, but only until the next crisis.
Skeptics of these tests (myself included) argue that passing them will not prevent any bank (large or small) from failing, in part because they’re not stressful enough and the proposed capital requirements are not high enough.
MIT Sloan Professor Michelle Hanlon
From The Hill
I recently testified at a Ways and Means Committee hearing about tax reform. While there is broad agreement about the need to reduce the U.S. corporate tax rate, which is now highest among the world’s advanced economies, Committee members asked how they could explain this to constituents. Would this be perceived as fair?
When businesses choose their legal form for tax purposes in the United States they have several options. The simplest option is that the owner can operate the business without a separate legal entity in which case the income is taxed directly to the individual on their tax return. This is known as a sole proprietorship. An alternative is a pass-through entity, which is not taxed at the entity level (generally) but instead “flows through” income to the owner(s) who are taxed on their individual income tax returns. These entities include partnerships, LLCs, and S-corporations.
The other common type of organizational form is the C-corporation, which is subject to an entity level tax. In addition, when dividends are paid, the shareholders are taxed on the dividend income. Thus, the C-corporation form of business organization may result in double taxation. Almost all publicly traded businesses are taxed as C-corporations, while many small business are organized as pass-through entities.
MIT Sloan Prof. Michelle Hanlon
From The Wall Street Journal
Apple issued $12 billion of U.S. debt in April, which gave the company a domestic cash infusion that allowed it to keep more earnings overseas. Last month Pfizer PFE attempted to acquire AstraZeneca, a transaction that would have made Pfizer a subsidiary of the U.K.-based company. These were useful examples in the taxation classes I teach at MIT’s business school, but the real-world implications of these decisions are troubling. Even worse, legislators have responded with proposals that seek to prevent companies from escaping the U.S. tax system.
The U.S. corporate statutory tax rate is one of the highest in the world at 35%. In addition, the U.S. has a world-wide tax system under which profits earned abroad face U.S. taxation when brought back to America. The other G-7 countries, however, all have some form of a territorial tax system that imposes little or no tax on repatriated earnings.
To compete with foreign-based companies that have lower tax burdens, U.S. corporations have developed do-it-yourself territorial tax strategies. They accumulate foreign earnings rather than repatriate the earnings and pay the U.S. taxes. This lowers a company’s tax burden, but it imposes other costs.
For example, U.S. corporations hold more than $2 trillion in unremitted foreign earnings, a substantial portion of which is in cash. This is cash that currently can’t be reinvested in the U.S. or given to shareholders. As a consequence, companies are borrowing more in the U.S. to fund domestic operations and pay dividends. Another potential effect is that companies invest the earnings in foreign locations.