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Reality Check on Corporate Tax Reform

Republicans on the House Ways and Means Committee say they are trying to produce a corporate tax reform proposal that cuts the rate from 35 percent to 25 percent but raises as much revenue as the current system by eliminating or reducing tax expenditures.

New estimates from Congress’ Joint Committee on Taxation (JCT), however, provide a harsh reality check to that effort.

JCT calculated how low the corporate rate could be set under a revenue-neutral reform that eliminated nearly all of the major corporate tax expenditures.  JCT’s answer: 28 percent — well above the proposed 25 percent.  And that relies on the politically dubious assumption that Congress would eliminate nearly all of those tax expenditures, many of which have strong support among lawmakers.

Another JCT finding should really raise a red flag.  JCT lowered the rate to 28 percent only by relying on offsets that raise large amounts of revenue over the next decade but much less in later decades, as JCT itself highlights.

The prime example is accelerated depreciation, which allows firms to deduct the cost of new investments at an accelerated rate.  By itself, eliminating accelerated depreciation pays for 53 percent of the ten-year cost of dropping the rate to 28 percent.  As JCT notes, however, the revenue gained by this critical offset peaks in 2017 and then falls sharply.

By 2021, the last year of the ten-year budget window, cutting the rate to 28 percent and eliminating the tax expenditures would cost $11 billion — and the net revenue loss would continue to grow after that, adding to long-term budget deficits.  This is not what the country needs.

The JCT study should prompt policymakers to step back and confront some basic questions:

  • Congress has made or is considering cuts in a wide range of programs and services to help reduce deficits; why should corporate taxes be off the table?
  • If policymakers opt for a corporate tax reform plan that is revenue-neutral rather than one that raises revenues, shouldn’t it at least be revenue-neutral over the long term, since our deficit problem is fundamentally long-term in nature?
  • House Republicans are also seeking to reduce the corporate tax rate on overseas profits to just 1.25 percent.  Why should we tilt the tax code even more in favor of overseas investments?   It is basic math that a lower tax rate on foreign profits requires a higher tax rate on domestic profits to raise the same amount of revenue.

While this debate obviously matters to businesses, it also matters a great deal to average Americans.  They have a deep interest in whether tax dollars go toward scientific research or education or to cut the corporate tax rate.  They also have a deep interest in whether the tax code tilts business incentives for or against domestic investment.  Congress needs keep their perspective in mind as it addresses corporate tax reform.

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Chuck Marr
Vice President for Federal Tax Policy