President Trump touts his plan to cut the corporate tax rate as one of the biggest tax cuts ever, as if he’s the first to propose such a thing. Practically forgotten is the fact that Trump’s predecessor, President Obama, also pushed for a cut in the corporate tax rate, which indicates rare bipartisan agreement, at least on the principle of reforming the corporate tax code.
Trump wants to slash the top corporate rate from 35% to 15%. Obama favored a more modest reduction, to 28%. While there’s a big gap between those two targets, Trump’s 15% rate is widely viewed as an opening bid that’s not plausible in reality. Congress could ultimately approve a rate between 20% and 25%, close to Obama’s target. Had the Republican-controlled Congress been willing to pursue Obama’s plan in 2015 or 2016—which it wasn’t—the final outcome could have been nearly the same as whatever happens with Trump’s plan.
Ordinary folks might wonder why it’s so important to cut taxes for corporations when profits are strong and the stock market is going gangbusters. If other countries had a top corporate rate comparable to the one in the United States, there’d be no reason for a reduction. But other developed countries have been cutting corporate taxes, as competition to lure big global employers has intensified. That has left the US with one of the highest corporate rates in the developed world.
Here are a few of the top rates around the world, including average state and local taxes on corporations:
United States: 38.91%
United Kingdom: 19%
Of 35 countries tracked by the Organization for Economic Cooperation and Development, the United States has the highest top rate. Many companies use credits and deductions to sharply lower the taxes they pay, but even that causes problems because some companies, such as real-estate developers, get generous breaks, while others, like healthcare companies, get relatively few. US tax law also favors companies with major foreign operations over those that mostly operate domestically and have far less access to overseas tax shelters.
The big disparity between rates in the United States and in other countries is one factor encouraging “corporate inversions” in which companies based in the United States make deals with foreign companies and relocate their headquarters to those countries, in order to take advantage of lower rates. It also explains much of the $2 trillion in profits that big companies such as Apple (AAPL), Microsoft (MSFT), Alphabet (GOOGL), General Electric (GE) and Pfizer (PFE) have stashed in foreign countries such as Ireland and Luxembourg, instead of bringing it back to the US and spending or investing it here.
Adding too much to the federal debt
It’s very unlikely Congress will pass tax reform cutting the corporate rate to 15%, since that would add more to the debt than many Republicans are likely to stomach. Corporate income taxes will generate about $420 billion in federal revenue in 2017, and an analysis last year by the Tax Policy Center found cutting the top rate to 15% would slash federal revenue from the corporate tax by more than 40%.
Treasury Secretary Steven Mnuchin has invoked the old supply-side claim that lower taxes would generate more economic activity and actually boost federal revenue in the long run, but history suggests otherwise. “Never in history has a tax cut paid for itself,” says Howard Gleckman of the Tax Policy Center.
A more likely target is a rate between 20% and 28%, which would still add to the debt, but not as severely. Obama’s plan would have offset lost revenue by ending a wide range of tax breaks and subsidies and imposing new fees on some financial firms. In theory, that would have made it deficit-neutral, meaning it added nothing to the national debt. The one tax break Trump said he’d kill, to protect federal revenue, is the tax deductibility of state and local income taxes for individuals, which was not part of Obama’s plan. Trump hasn’t said much about whether he’d consider other measures that were part of the Obama plan.
There are tons of crucial details that will take months, if not longer, to iron out. Trump also wants to rejigger the personal income-tax structure, cutting 7 brackets to 3 and lowering the tax bite for just about everybody. Tax cuts for the wealthy will generate staunch Democratic resistance, but middle-class tax cuts seem essential in order to justify cuts for corporations (which largely benefit the wealthy anyway, since they’re the shareholder class). States and cities will fight furiously against Trump’s proposal to kill the deduction for state and local taxes, and other industry groups will do the same if their favored tax break is targeted. And if Trump tries to cut corporate taxes without also aligning personal income taxes to the new rates, he’ll create a powerful incentive for some filers to claim corporate status, and enjoy lower rates, even if they’re not legally qualified to do so, a potentially huge abuse. As Obama could have told Trump—tax reform is complicated. Big-league complicated.
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Rick Newman is the author of four books, including Rebounders: How Winners Pivot from Setback to Success. Follow him on Twitter: @rickjnewman.