The One Trump Proposal Democrats Like Too
A key part of Republican presidential nominee Donald Trump's economic program, touted in a speech Monday in Detroit, is to cut the corporate income tax rate.
As Trump points out, at 35%—and as much as 39% including state and local taxes—the U.S. has one of the highest corporate tax rates in the world. Trump's plan, which he had previously outlined, would cut that top rate to 15%, while closing some loopholes to make up some of the lost revenue.
While Trump has offered up a number of controversial proposals, from building a wall along the Mexican border to tearing up trade agreements, slashing the corporate tax rate actually appeals to mainstream economists on both sides of the political spectrum.
Even so, passing a law that cuts corporate taxes won't be simple. Here are five reasons why.
1) The devil is in the details
These days politicians are loathe to admit they agree with their political opponents on anything. But cutting corporate taxes is one of the few economic reforms that both Republicans and Democrats say they want. As recently as last year, President Obama himself proposed his own plan to trim corporate tax rates. It was not as radical as Trump's: Instead of cutting rates from 35% all the way down to 15%, Obama proposed a top rate of 28%. And unlike Trump's plan, which would dramatically increase the budget deficit (more on that below), Obama's plan was designed to be a wash in terms of revenue.
Even Obama's relatively modest plan, however, stalled in Congress. The reason: Republicans didn't necessarily agree with the president on how to treat corporations' foreign profits and whether or not corporate tax cuts should be paired with reductions on individual rates.
2) It's not clear who really pays corporate taxes
When it comes to corporate taxes, many of us imagine the burden being shouldered largely by billionaire owners and fat cat CEOs. But that's not necessarily the case. For one thing, most corporate shareholders aren't billionaires, but working Joes and Janes who hold stocks in their 401(k)s through mutual funds. Corporations could theoretically cut CEO pay to cover higher tax bills, but they might decide to cut pay for rank-and-file workers instead, or in addition. Of course, yet another way to cover the cost of higher corporate taxes would be to raise the prices on the goods and services companies produce—but because poor and middle-class workers spend more of their income than the wealthy do, that would undermine the progressive intentions of raising the corporate tax rate in the first place.
Bottom line: Economists hotly debate who ends up paying corporate taxes, further complicating the politics of the issue.
3) Our corporate tax rates aren't as high as they seem
Politicians, especially business friendly ones, like to point out that U.S. corporate tax rates are the highest among all major nations. Trump did just that on Monday.
And it's true: The top combined federal and state rate of 39% is as high as or higher than any nation's other than Chad and the United Arab Emirates.
But as with the personal income tax, not everyone pays the top nominal rate. Who pays what depends a lot on industry. (Energy companies and retailers tend to pay more, while tech and pharmaceutical firms pay less.) And the average "effective" rate, though a matter of up for debate, is generally agreed to be well below 39%. According to Politifact, which recently compiled results of several studies, the average U.S. company ends up paying somewhere in the range of 27% or 28%—which is middling to high compared to other developed nations, not off the charts.
4) Loopholes are hard to close
Another favorite bugaboo of politicians, including Trump, are so-called corporate "loopholes" that allow some huge, highly profitable companies like General Electric to pay little or nothing. Indeed, closing corporate tax loopholes that amount to political favors for particular industries is one way to promote fairness and, as Trump has suggested, win back some lost revenue from a rate cut.
But it's not that simple. Yes, getting rid of corporate tax loopholes would grow overall corporate tax receipts by one-third, according to a recent analysis by the Tax Policy Center—enabling the federal government to cut the top rate to about 23% without decreasing overall tax revenues. That's a steep cut, but not nearly as steep as the 15% rate Trump has proposed.
Perhaps more problematic, though, is that eliminating the biggest loopholes would involve more aggressively taxing U.S. corporations' foreign profits, which would mean fighting the powerful business lobby and could prove hard to enforce given the enormous corporate brain power devoted to avoiding taxes already.
Closing other loopholes—like tax breaks tied to purchasing new business equipment and research and development spending—could backfire by hurting investment and innovation.
5) A lower rate would help...but also hurt
One key argument for slashing corporate tax rates is that it would boost economic growth and create jobs. Trump's plan would do that, according the Tax Foundation, which projects that his overall economic program would boost the size of the economy by about 11% in the long run and create about 5.3 million new jobs. (Those estimates also include the effect of Trump's an individual tax plan, which changed on Monday; however, the Tax Foundation has also said the extra growth and new jobs were mostly a result of the corporate tax cut, which remained unchanged.)
But that growth wouldn't come without a cost: The same Tax Foundation analysis projected that Trump's corporate income tax cut alone would cost the Treasury $1.54 trillion over ten years. Factoring in extra economic growth that Trump says the plan would unleash shrinks the shortfall—but not by that much. The Tax Foundation projects the resulting budget deficit would still amount to about $1.37 trillion.