Common Sense: What Would It Take for Trump to Get His Corporate Tax Wish?

Common Sense: What Would It Take for Trump to Get His Corporate Tax Wish?

- in World Biz
8
0

After last week’s 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 conservative-leaning Tax Foundation, told me this week: “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 percent 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 percent 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 percent 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. (A cut in pass-through rates has much less impact under dynamic scoring, because individuals and small businesses spend far less on capital projects and thus do less to stimulate the economy.)

Paying for corporate tax cuts of that magnitude “is a tremendous challenge if you don’t want to blow a hole in the deficit,” Mr. 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 percent. The 2014 proposal from Representative Dave Camp, a Michigan Republican who was then the House Ways and Means Committee chairman, struggled to reach 25 percent. And when President Barack Obama nearly reached a “grand bargain” on tax reform with Republicans in 2013, he could only get to 28 percent, with 25 percent for some manufacturers.

“The math is really hard,” said Ray Beeman, a tax expert at Ernst & Young and a former adviser to Mr. Camp. “There’s really no big source of revenue that won’t rile people up.”

Coal miner apparel and flags for sale in Waynesburg, Pa., home to many Trump supporters.

Credit
Maddie McGarvey for The New York Times

And yet 15 percent 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 percent 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 Center.

The Joint Committee on Taxation estimated that in 2016 the corporate income tax raised $300 billion 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 billion over 10 years, the Tax Policy Center estimates. Many economists like the idea of eliminating the deduction because it favors borrowing over other forms of raising capital, like issuing stock. But big borrowers like real estate developers love the deduction, and Mr. 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 favor that approach, because it reduces the double-taxation problem embedded in the current system. (Corporations pay taxes on profits, and then, when these are distributed, shareholders pay.) 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 percent 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. 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 United States.

Environmentalists and many economists would love to see a carbon tax, which would presumably be repellent to an administration that is skeptical of climate change and wants to promote the coal industry.

The point, however, is that if Mr. Trump and Republicans in Congress are serious about a 15 percent rate without vastly increasing the deficit, there are many ways to get there.

Then there’s the 15 percent pass-through rate. While taxing small businesses and partnerships at the same rate as corporations has a superficial appeal, there’s nothing that says they have to be the same. As the Tax Foundation maintains, cutting rates on these businesses has relatively little impact on growth. The House Republican blueprint was comfortable with a rate of 25 percent for small businesses and pass-through taxpayers, still a significant reduction from current ordinary income rates. And the 1986 reform act didn’t require that pass-through entities pay the same rate as corporations.

“There’s nothing magic about 15 percent,” Mr. Rosenthal said.

The closer the pass-through rate is to ordinary income rates, the lower the incentive for lawyers, accountants, doctors and other service professionals to reorganize themselves into pass-through entities to avoid paying the higher rates. How to distinguish individual professionals from actual businesses has long vexed legislators trying to rewrite the tax code. “A big issue has always been, how do you prevent a pass-through owner who is really a wage earner or service provider from escaping the higher ordinary income tax rate?” Mr. Beeman said.

Everyone I spoke to mentioned that lowering corporate tax rates to anything close to 15 percent requires political courage and leadership to overcome the powerful special interests that benefit from existing loopholes — starting with real estate. Whether Mr. 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,” Mr. 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 globalization and the state of the economy — the same people who voted for Trump.”

Correction: August 5, 2017

The Common Sense column on Friday, about hurdles that President Trump faces in reducing corporate tax rates, misstated an estimate by the Tax Policy Center for the 10-year federal revenue increase from eliminating the interest deduction. The projection is $700 billion, not $700 million.

Continue reading the main story

Source link

Leave a Reply

Your email address will not be published. Required fields are marked *

You may also like

De Blasio Would Sooner Tax the Rich Than Befriend Them

And when Mr. de Blasio rolled out his