Paying for Corporate Tax Rate Cuts is Hard

By :: August 13th, 2013

Covering the revenue loss from deep individual income tax rate cuts while maintaining the income tax’s current progressivity is difficult, as Howard Gleckman explained here last week. It turns out that paying for corporate tax rate cuts is even harder. And new Tax Policy Center estimates show that lowering corporate tax rates without paying for lost revenue would be highly regressive.

Calls for reducing the top corporate tax rate from the current 35 percent have come from a wide array of sources, ranging from the president to members of Congress on both sides of the aisle to the business community and many economists. Our top rate is higher than that of any other developed country. That discourages investment in the U.S., and encourages income-shifting to avoid tax. Cutting our corporate tax rate makes economic sense.

But, as is the case with the individual income tax, proposals to reduce corporate taxes haven’t included specific provisions to replace the lost revenue.

That cost isn’t small: The Joint Committee on Taxation recently estimated that cutting the rate to 25 percent—and eliminating the corporate alternative minimum tax—would reduce revenue by $1.3 trillion over the next decade. Proponents of rate cuts generally imply that they would cover the lost revenue by paring back or eliminating corporate tax expenditures. The problem with that is there aren’t enough of the latter.

On paper, the sum of Treasury estimates of corporate tax expenditures appears to be big enough that eliminating them could pay for the rate cut. But a closer look suggests otherwise.

The two biggest tax expenditures are the deferral of foreign-source income of U.S. controlled foreign corporations and accelerated depreciation for machinery and equipment. But eliminating deferral would raise much less after the rate cut than the tax expenditure estimate, simply because deferral saves much less tax with lower rates. And in any case, Congress is unlikely to cut back on deferral: this year’s House budget resolution went the other way, proposing a territorial tax that would exempt most foreign-source income.

Eliminating accelerated depreciation is also unlikely. Recent administration budgets have proposed making depreciation more generous, not less. And eliminating accelerated depreciation to pay for rate cuts for all corporations would raise the effective tax rate on new investments in U.S. manufacturing.

Take those big preferences off the table and the revenue potential of base-broadening shrinks dramatically.

If we don’t pay for a corporate rate cut by broadening the tax base, whom would the cut benefit (beyond any potential boost to the economy)? Even though corporations write the checks, the tax is ultimately borne by people—investors, workers, or consumers. While economists disagree about how the burdens are distributed, our best reading of the evidence is that 20 percent of the tax falls on workers and the rest hits owners of capital. Most of the tax falls on high-income households because they own most of the nation’s capital.

As a result, reducing the corporate tax rate by itself would be highly regressive, as TPC’s new tables show. More than two-thirds of the tax savings would go to the top 20 percent of households and slightly more than half of that to the top 1 percent—households making more than about $2.1 million in 2015. Their taxes would drop an average of more than $35,000 that year, boosting their after-tax income by 2.6 percent. In contrast, people in the middle 20 percent—making an average of about $66,000—would pay an average of $300 less in corporate income tax, ticking their after-tax income up just 0.5 percent.

If it were possible and politically feasible, paying for the rate cut by paring back corporate tax expenditures would undo some or all of that regressivity. Just as lowering corporate taxes disproportionately benefits high-income taxpayers, raising the tax disproportionately harms them.

Whether Congress can find enough tax increases to offset the revenue lost from cutting corporate tax rates will determine the answers to two important questions: whether corporate tax reform will be revenue neutral and whether changes will affect the progressivity of the tax.

11Comments

  1. Michael Bindner  ::  1:46 am on August 14th, 2013:

    The biggest deduction for corporations is wages. If you really want to lower the rates, eliminate the wage and salary deduction – essentially turning the business income tax to a net business receipts tax (essentially, a hidden VAT with offsetting credits for such things as an expanded child tax credit). Of course, to eliminate double taxation you would have to eliminate the income tax for most individuals and families, with a graduated rate system from the higher standard deduction to the top tax rate (which would likely be equal to the NBRT rate). Such major reform, especially anything that smacks of a VAT, will never pass without a great deal of education for both Congress and the President. More importantly, unless you are stopping individual income tax payment while increasing the subsidy for families, tax reform is simply not worth doing.

    The impetus for doing tax reform at all was to find a way to make the Bush rates permanent for upper income taxpayers while preserving cuts for the bottom 98%. The ATRA did that already – with excellent revenue results (although some of this may be because people cashed in their capital gains and paid their taxes before the rates went up). I don’t see where the President has any incentive to waste his time on tax reform at all – other than to provide an opportunity to bash Republicans as looking out for the rich.

  2. Tax Roundup, 8/14/2013: Tax Court Trifecta: IRS agent gets creative on her own 1040, Shareholder stuck, and not quite a real estate pro. « Roth & Company, P.C  ::  9:57 am on August 14th, 2013:

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  3. Clay Lowery  ::  5:32 pm on August 14th, 2013:

    Interesting post. How does the CBO score for 2 aspects of lowering the tax? (1) many corporations do not repatriate their profits given, one can presume, the highest nominal rate in the world. Does CBO account for this in the impact on revenues — 35% of Zero is certainly less than 25% of X? (I assume that CBO uses some methodology to account for this but not clear from the linked letter). (2) Is there anyway to account for lost investment’s impact on growth and therefore tax revenues. In other words, if corporations keep their investment parked overseas and invest it overseas instead of repatriating it and investing it in the U.S. — I assume there is an effect on business investment, which is an important component of GDP and presumably tax revenue.

  4. TaxVox » Blog Archive » Paying for Corporate Tax Rate Cuts is Hard « Tax Rate Calculator  ::  12:41 am on August 15th, 2013:

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  6. Ralph H  ::  11:03 am on August 16th, 2013:

    Two points. 1) The winners in the present system are large, multinational companies with the ability to play games with intellectual property and foreign production. They are able to hire lobbyists and are cool, thus in favor with the administration. Apple, Google, Microsoft, GE. Losers are companies who employ lots of middle class folks, but are out of favor. Wallmart, most small to mid size “C” corps, and most retail chains.
    2)The winners do not get much out of this as the presently pay little, if any US tax and could lose a lot if deductions end.

    As a result this is DOA.

    Side comment to Mr Binder. Our biggest problem as a country is the loss of worker jobs. Ending the deductibility of wages would accelerate the problem by making automation and foreign sourcing more attractive. If I read you right that would not be your intent.

  7. TaxVox » Blog Archive » Paying for Corporate Tax Rate Cuts is Hard – Let You Know Everything  ::  4:44 pm on August 16th, 2013:

    […] Read More: TaxVox » Blog Archive » Paying for Corporate Tax Rate Cuts is Hard […]

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