For President Donald Trump, 15 is the magic number. That’s the percentage at which he wants to cap the corporate tax rate, a steep cut from the current top rate of 35 per cent and much lower than the ordinary income rates paid by many partnerships and small-business entities.
When news reports indicated recently that the goal was more likely to be set at 20 per cent, or even higher, the president swiftly doubled down on 15 per cent. There’s no doubt that a cut to 15 per cent would be big, bold, and historic. It might even be the biggest cut ever in corporate tax rates, to use another superlative Trump is fond of invoking.
It might do wonders for economic growth, level the competitive playing field, and encourage American corporations to keep their headquarters in this country and invest trillions in cash currently stashed in offshore accounts. A 15 per cent rate would take the US from having the highest corporate tax rate among industrialised nations to having one of the lowest.
Britain is moving to 17 per cent, Canada’s federal rate has already gotten to 15 per cent, and Ireland’s is at 12.5 per cent.
After the collapse of health care legislation, many believe Republicans can’t afford to fail again, especially on what is widely considered their signature issue: taxes. As Scott A. Hodge, president of the Tax Foundation, said: “If the Republicans fail with tax reform, it would be truly catastrophic. It’s really all or nothing at this point.”
There’s only one major stumbling block to a 15 per cent rate, and the conventional wisdom is that it’s an intractable one: how to pay for it. According to estimates by the Tax Foundation, a cut in the corporate rate to 15 per cent would add $2.2 trillion to the deficit over 10 years on a “static” basis, which assumes no additional economic growth. After factoring in growth and higher resulting tax receipts, known as “dynamic” scoring, the deficit would grow by $1 trillion, according to the foundation.
And if rates also go to 15 per cent for pass-through entities — businesses that pay taxes at individual rates, like limited-liability corporations and partnerships — that adds another $1.5 trillion on a static basis, and $1.3 trillion on a dynamic basis, the foundation estimates.
Paying for corporate tax cuts of that magnitude “is a tremendous challenge if you don’t want to blow a hole in the deficit,” Hodge said. “Anyone writing tax legislation will find that the options are very limited.”
How big is the challenge? In their tax blueprint, House Republicans could only get the corporate rate to 20 per cent. The 2014 proposal struggled to reach 25 per cent.
And when President Barack Obama nearly reached a “grand bargain” on tax reform with Republicans in 2013, he could only get to 28 per cent, with 25 per cent for some manufacturers. “The math is really hard,” said Ray Beeman, a tax expert at Ernst & Young. “There’s really no big source of revenue that won’t rile people up.”
And yet 15 per cent just might be possible. For starters, eliminating the deductions and loopholes in the corporate tax code would go a long way toward paying for a significant corporate rate cut. There are so many of these that few companies actually pay the 35 per cent statutory rate.
“Corporations benefit from all kinds of loopholes, especially the one allowing earnings to accumulate offshore without being taxed,” said Steven M. Rosenthal, a tax expert and senior fellow at the Urban-Brookings Tax Policy Centre. The Joint Committee on Taxation estimated that in 2016 the corporate income tax raised $300 billion (Dh1.1 trillion) in revenue, while what it called “targeted subsidies” cost about $270 billion.
In other words, Congress could eliminate the subsidies and cut the corporate rate nearly in half without any significant loss in revenue. Some of these tax subsidies are considered untouchable, like the deduction for employee health care costs. But others are expendable.
One of the biggest is the interest deduction. Its elimination would raise $700 million over 10 years, the Tax Policy Centre estimates. Many economists like the idea of eliminating the deduction because it favours borrowing over other forms of raising capital, like issuing stock.
But big borrowers like real estate developers love the deduction, and Trump hasn’t yet said that he’s prepared to scrap it. Another possibility would be to shift at least some of the tax burden from corporations to shareholders, by raising tax rates on capital gains and dividend income.
Many economists favour that approach, because it reduces the double-taxation problem embedded in the current system. The added tax burden would fall primarily on affluent taxpayers since they tend to own stocks, helping to rebut the argument that slashing the corporate rate would be a tax cut for the wealthy.
While it’s difficult to estimate how much additional tax revenue would be generated if dividends and capital gains were taxed at the same rate as ordinary income, it would surely be substantial, another big step toward a 15 per cent corporate rate. Taxing ordinary income, capital gains and dividends at the same rate would also greatly simplify the tax code.
The notion does, however, run up against Republican orthodoxy that low capital-gains rates stimulate growth. There are many other ways to raise revenue, of course.
US House Republicans proposed a border adjustment tax, popular with many pro-growth economists, which powerful retail interests shot down. Most European countries fund their low corporate taxes with some form of a value-added tax, on consumption rather than income.
House Republicans have nodded in that direction, but a value-added tax runs afoul of many of the same interests that opposed the border tax, and has never been popular in the consumption-friendly US. Environmentalists and many economists would love to see a carbon tax, which would presumably be repellent to an administration that is sceptical of climate change and wants to promote the coal industry.
The point, however, is that if Trump and Republicans in Congress are serious about a 15 per cent rate without vastly increasing the deficit, there are many ways to get there.
Everyone I spoke to mentioned that lowering corporate tax rates to anything close to 15 per cent requires political courage and leadership to overcome the powerful special interests that benefit from existing loopholes — starting with real estate. Whether Trump can set aside personal interests and rise to the challenge remains to be seen.
Many tax experts hope he will. “What’s important is not just getting a home run under his belt,” Hodge said. “The Republicans have to get tax reform right. They have to make sure it delivers the kind of growth that boosts productivity and real wages and living standards.
“If they do get it right, it can dramatically improve the lives of the people who feel most aggrieved about globalisation and the state of the economy — the same people who voted for Trump.”
— New York Times News Service