Trump’s Proposed Corporate Tax Cuts: Where We Are Now
By Scott Wentz, Managing Director, US Tax, Radius
President Trump’s new tax proposal, unveiled on April 26 but containing few specifics, calls for a reduction of the corporate tax rate from 35 to 15 percent, a repeal of the corporate alternate minimum tax and an end to most tax deductions.
The plan would also impose a one-time transition tax of up to 10 percent on existing unrepatriated foreign income of US companies, payable over 10 years. Future profits of US foreign subsidiaries would be taxed each year as profits are earned, instead of when they are repatriated, as they are now.
Missing from the proposal is a border adjustment tax on imports that US House Republicans had floated previously as a means to offset revenue losses from the cuts.
A Need for Change
Reaction to the plan has been mixed. Legislators and pundits on both sides of the political spectrum have long called for an overhaul of the corporate tax structure. The US has the highest corporate tax rate among the 35 OECD nations and the third-highest in the world.
As a result, many corporations have relocated outside the US — usually by selling themselves to or merging with a foreign company in a process known as tax inversion, which exempts companies from paying taxes until their foreign revenues are returned to the US. Tax inversions indefinitely deprive the US government of tax money.
Starting in 2014, the Obama Treasury department tweaked the rules several times to reduce the tax benefits of inversions, but companies have continued to flee to countries like Ireland, which has a 12.5 percent tax rate. US companies are currently holding $2.6 trillion outside the country because of high American taxes.
A lower tax rate could theoretically stem the tide of inversions and make the country a more competitive place to do business. Some academic research suggests that lower corporate rates might also increase wages.
Is It Feasible?
Trump’s plan comes with a big question mark — how will the country pay for it?
According to The Economist, Congressional Budget Office numbers show that lowering the rates would cost more than $2 trillion over the next ten years, or roughly 5 percent of all federal revenues. Repealing all the deductions Trump has promised to eliminate would generate about $126 billion per year, but that would pay for less than half of the proposed reforms, the journal said.
A Tax Policy Center report said that the cuts Trump proposed during the campaign could cost $6.2 trillion over 10 years.
Treasury Secretary Steve Mnuchin has said the tax cuts will pay for themselves by producing greater economic growth. Economist Kevin Hassett, whom Trump has nominated to be chairman of his Council of Economic Advisers, has done research showing that tax cuts have produced economically significant investments in 12 of 14 countries studied. But other economists, both Democrats and Republicans, have expressed skepticism of the plan and fears about a large deficit. Some financiers have suggested that Trump’s plan could be an opening gambit towards negotiating a less radical deal.
Can It Pass?
Trump would likely need bipartisan support to pass his plan into law. A bill that would increase the deficit for more than 10 years needs more than a simple majority to pass. To get around that problem, Congressional Republicans plan on using a process called reconciliation that would allow the new law to pass with just 51 Senate votes, but it would not be able to extend the deficits beyond a decade.
White House National Economic Council Director Gary Cohn has said that a permanent plan would be better, noting that corporations need to make large investment decisions in advance. Others echoed his words.
In any case, a tax reform bill is not imminent. The Trump administration has said negotiations will be necessary to work out the details. It hopes to have a bill ready for the president to sign by the end of the year, but the economic impact and controversy of Trump’s plan suggest the wait could be much longer and the final result less dramatic.