For all the talk about the need to drastically reduce the US corporate tax rate, there’s almost no agreement on how that should be accomplished.
House Republican leaders have advocated cutting the rate from 35 percent to 20 percent. President Trump wants to see it at 15 percent.
But paying for a lower corporate rate by eliminating corporate tax expenditures just isn’t that effective, largely because there aren’t enough credits, deductions, and other targeted tax preferences to provide that much of a reduction, according to Tax Foundation analyst Scott Greenberg.
In fact, Greenberg did his own calculations, computing the revenue impact of eliminating corporate tax preferences, credits, and deductions. The result? Eliminating all 54 “nonstructural” tax breaks would only drop the corporate tax rate to 28.5 percent.
To get a lower corporate rate, legislators will have to either pass a tax cut that adds to the deficit, uses pay-fors on the individual side, or structurally changes the tax code, Greenberg contends. In short, it means legislators will have to “think outside the box,” he says.
Greenberg reached the 28.5 percent rate by modeling a three-part scenario: the tax cut would be “revenue-neutral” without cutting spending or increasing the deficit, be “corporate only” by eliminating tax breaks for corporations without raising revenue from other federal taxes or eliminating tax breaks for individuals, and be nonstructural without changing the actual structure of the corporate tax code.
His model eliminates 54 corporate tax expenditures, with the revenue used to pay for the cost of lowering the corporate income tax rate.
To meet the corporate-only goal, Greenberg cut the portion of each tax expenditure that applies to C corporations and not the portion that benefits pass-through businesses and households. To satisfy the nonstructural goal, he modeled the elimination of every corporate tax expenditure except those that accelerate cost recovery, defer the taxation of gain, and affect the taxation of foreign-source income. Why? Because those could be seen as efforts to change the tax code structure.
Thus, he arrived at the 54 nonstructural corporate tax expenditures (click here for the entire list). Combined, they amount to $766 billion in revenue over the next decade.
So, how could legislators actually get the corporate tax rate below 28.5 percent? In one of these three ways, Greenberg contends:
- Pass legislation that is not revenue-neutral by either cutting federal spending or increasing the federal deficit;
- Pass legislation that is not corporate-only by cutting tax breaks for households and noncorporate businesses, or by seeking revenues in other parts of the tax code to reduce the corporate income tax; or
- Rather than eliminating tax expenditures, legislators could make structural changes to the corporate income tax.
The third option has already spawned some ideas, including a House Republican proposal that would flip the treatment of interest in the business tax code, eliminate the deductability of interest paid, and lower taxes on interest received. This, Greenberg says, would raise more than a trillion dollars over 10 years.
Another idea is to make the federal income tax border-adjustable, which also would raise about a trillion dollars.