President Donald Trump’s embryonic proposal to slash tax rates for businesses big and small is the opening gambit in what is likely to be a protracted fight over how the federal government raises money. It also marks the end of a fragile consensus on corporate tax rates, which many Democrats and Republicans believe are too high.
The corporate tax rate is currently 35 percent—the fifth highest in the world in absolute terms. Even when you factor in various deductions and loopholes, the tax is still well above average by various estimates. Large numbers of both Democrats and Republicans believe the high levy makes it difficult for America to compete in the global economy—and actually deprives the government of badly needed revenue. Corporations hoard their profits overseas to avoid the high U.S. rates: This so-called inversion totals more than $2 trillion by some estimates. If that money were brought back to the U.S., it could be invested to create more jobs here, and the federal government would get a piece of it.
Trump will propose to lower business taxes to 15 percent—and not just for corporations. He would also apply a 15 percent tax rate to businesses that currently “pay through” their individual income taxes. If you have a freelance graphic design business or a candy shop, you’re likely to list the income on your individual income taxes and pay the individual rate, which can be as high as 39.6 percent for top individual earners making over $418,000 a year. It’s 25 percent or 28 percent for the vast majority of taxpayers. So this would be a huge cut not only for multinational corporations but for mom-and-pop businesses, which is part of what makes the idea so big—and why it could end up costing the Treasury more than $2 trillion over the next decade, according to one estimate, and as much as $6 trillion, according to others.
So far, the Trump administration isn’t proposing any offsetting budget cuts or closing tax loopholes to pay for this radical change. At some point, it’ll have to, and that will very likely force the administration to scale back its plan.
Budget rules in the Senate demand that any tax cut that adds to the deficit more than 10 years in the future can’t be passed through a simple majority vote. This is the much-discussed Byrd Rule, and while it’s obscure, it’s still really important. It poses a huge problem for Republicans and the White House, which don’t have the votes to overcome a Democratic filibuster. This was the case with the George W. Bush tax cuts of 2001 and 2003, which were passed with 10-year limits and were later modified by Congress.
The practical effect is that Trump is going to have to scale his plan way back or come up with offsets—hiking other taxes or slashing spending—to pay for this mammoth business giveaway. Even one of House Speaker Paul Ryan’s top tax advisers, George Callas, sees no chance of its passage without offsetting tax hikes or budget cuts: “A plan of business tax cuts that has no offsets, to use some very esoteric language, is not a thing, It’s not a real thing. And people can come up with whatever plans they want. Not only can that not pass Congress, it cannot even begin to move through Congress day one.”
In all likelihood, Trump will have to come back with offsetting cuts. So far, he’s rejected the so-called Border Adjustment Tax, a duty on imported goods that many Republicans favor. If he takes on some of the sacred cows in the tax code, such as the deductibility of mortgage interest, he’ll be in even bigger trouble.
The irony here is that there is a consensus for cutting corporate rates. Senator Ron Wyden, the ranking Democrat on the powerful Senate Finance Committee and a staunch progressive, favors getting the rates down while closing various corporate loopholes, such as the carried interest deduction that allows partners in hedge funds and private equity concerns to see their incomes taxed at much lower capital gains rates. He also opposes corporations being allowed to shelter their profits overseas indefinitely. Charles Rangel, the longtime chairman of the House Ways and Means Committee who retired last year, also favored lower corporate rates.
So a limited deal, one that cuts corporate rates modestly but also closes various loopholes, really could pass Congress. It hasn’t happened to date because lawmakers have tried to pass a massive tax reform that would address individual and business rates at the same time. (Former Ways and Means Chairman Dave Camp of Michigan devoted countless hours to forging a huge tax reform akin to the last time such an overhaul was made way back in 1986.) A limited effort to cut business taxes that was cleaved from an overhaul of the entire code would have a decent chance of passage. But that would require Trump to scale back his plans and for Democrats to be willing to cut business rates before providing more relief to families. It’s possible but not easy.
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