Corporate Tax Reform Must Be Gimmick-Free

The President’s framework for corporate tax reform affirms an extremely important principle: reform must not rely on budget gimmicks to hide its true long-term cost:

While a number of the measures that raise revenue in corporate reform . . . raise more revenue in earlier years than they do in later years, the President is committed to corporate tax reform that does not add a dime to the deficit, over the next decade or thereafter [emphasis added].

Any corporate reform should adhere to this principle.  Otherwise, policymakers could adopt a plan that doesn’t add to deficits over the official ten-year budget window yet worsens the nation’s long-term deficit problem.

Estimates by the Joint Committee on Taxation (JCT) show why the principle is so important.  JCT found that if we eliminated nearly all major corporate tax expenditures (credits, deductions, and other tax preferences) and dedicated the resulting revenues to lowering the corporate rate, we could drop the rate from 35 percent to 28 percent.  That wouldn’t add to deficits over the next decade.  But, as JCT noted, it would add to deficits in the long run because much of the savings from eliminating corporate tax expenditures wouldn’t continue outside the ten-year budget window.

Most notably, the savings from eliminating “accelerated depreciation” (a set of rules that allow firms to deduct the cost of new investments at an accelerated rate) would peak at $67.3 billion in 2017 but fall sharply thereafter, to $44.5 billion by 2021, and likely continue to fall in later years.

Given the nation’s long-term budget problems, a well-designed corporate tax reform proposal should help rein in deficits; the fact that the President’s framework aims only at revenue neutrality is a major weakness.  Still, the Administration gets it exactly right when it makes clear that reform must be fiscally responsible not just in the early years, but over the long term as well.