Originally published by Morning Consult on September 20, 2017.
President Donald Trump has consistently called for a bold reduction in corporate taxes. He wants to cut the top federal corporate rate from 35 percent to 15 percent, which would provide tremendous benefit for workers and the U.S. economy. Unfortunately, congressional Republicans have so far demurred, seemingly leaning toward much smaller reductions. It would be a waste of a rare and historic opportunity for Republicans to adopt only tepid cuts.
Not since Ronald Reagan’s reforms in 1986 has the tax code received serious scrutiny. There have been a few cuts in that time, and unfortunately some hikes as well. And plenty of new carve-outs have been introduced, making the tax code more complex and less fair each time.
Other nations have not been so idle. While the combined state and federal corporate tax rate in the U.S. has hovered just under 40 percent for decades, the average among OECD member nations has steadily declined and rests far below the United States at about 25 percent. This is why corporations keep looking for ways, such as through so-called inversions, to move their headquarters and economic activity abroad.
Setting aside the issue of competitiveness, corporate taxes are excessively destructive. No tax is good for the economy, but some are clearly worse than others. Economic research has revealed that the corporate tax is perhaps worst of all in the damage it does to the economy per dollar collected, and the pain it causes is felt by all Americans.
A new report from Adam Michel of the Heritage Foundation documents evidence from the economic literature showing that corporate taxes are primarily paid by workers in the form of lower wages. Estimates range from 75 to 100 percent of the tax coming from workers, with whatever remains falling on owners. Because of this, the after-tax income of working-class Americans would see a significant boost after a corporate rate cut.
The corporate tax system, like the rest of the tax code, is of course filled with loopholes and crony handouts, though high marginal tax rates still discourage investment in the United States and drive businesses overseas. Closing these loopholes, called base-broadening in Washington-speak, will offset some of the rate reductions.
But congressional Republicans claim they can’t make the numbers work with the corporate rate at 15 percent. Insofar as this is an issue, it is entirely one of Republicans’ making.
Government bean-counters on the Joint Committee on Taxation (JCT) use models out of step with the economic literature and real-world evidence to undersell the benefits of tax reform. They simply don’t pay enough attention to how individuals and businesses will change their behavior under a tax code that is simpler and contains fewer penalties on productive behavior.
For some inexplicable reason, Republicans never clean house at JCT when they come into power. It’s a stacked deck in favor of big government that they have once again left in play and now they’re paying the price. The good news is that they can at least somewhat sidestep the problem if they are truly committed to bold reforms.
Because they’ll be using reconciliation to avoid a Democratic filibuster, the Byrd Rule prevents deficit increases outside of the budget window. Since JCT will not account for the full benefits of pro-growth reform, it means Republicans are stuck having to choose between temporary reforms that expire at the end of the budget window (typically 10 years) or smaller rate reductions. Temporary reforms are less beneficial for the economy because businesses anticipate future tax burdens when making decisions.
However, if Republicans have any gumption, they can simply choose to set the window for something like 25 years instead of 10, thereby providing more tax certainty for businesses. Otherwise, they’ll have to choose between competing pro-growth reforms.
Some Republicans want to prioritize corporate rate cuts behind a move to “full expensing.” Expensing would allow businesses to immediately deduct capital expenditures, rather than doing so over the course of several years through a process called depreciation. Expensing would certainly be pro-growth, but there’s always been a disconnect between how highly economists tout it and what businesses say actually motivates their decision-making. Full expensing is also much more “expensive” according to the budget scorers that Republicans left in control.
Moreover, while European socialists are wringing their hands at the prospect of dramatic corporate rate cuts that would make the United States competitive again, they aren’t similarly hyperventilating about full expensing. It seems that from a competitiveness standpoint, a 15 percent corporate rate should take precedence.
Republicans have made the job of passing tax reform harder than it needs to be. But they have a clear path ahead if only they choose to follow it. After all their legislative stumbles this year, it’s time to go big or go home.