Can we afford to lower the corporate tax rate?
Congress did it in 1986, and the president wants to do it again.
One of the biggest applause lines in the President’s State of the Union speech came from his promise to reform and simplify the corporate income tax:Skip to next paragraph
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So tonight, I’m asking Democrats and Republicans to simplify the system. Get rid of the loopholes. Level the playing field. And use the savings to lower the corporate tax rate for the first time in 25 years –- without adding to our deficit. It can be done.
That sounds straightforward. We did this, after all, in 1986. Congress lowered the top corporate tax rate from 46 percent to 34 percent (since raised to 35 percent), while closing many business tax preferences and raising more corporate revenue. What are the chances that we can do this again?
To get a rough idea, I added up the cost of business tax expenditures reported in last year’s budget. In all, they total about $640 billion between 2011 and 2015. About $506 billion of these losses (just under 80 percent) come from corporate taxpayers. Businesses organized as “flow-through enterprises”(S corporations, partnerships, sole proprietors) benefit from many of the same provisions as taxpaying corporations. Their owners would also pay more tax if we eliminate business tax preferences. So, any revenue-neutral combination of lower corporate rates and reduced business tax preferences would lower corporate tax receipts and increase individual tax receipts.
Over the 5-year period, estimated business tax expenditures add up to about a third of projected corporate receipts. If wiping them all out permitted proportionately lower rates, the top corporate rate could fall to 23 percent without any loss in overall revenue. But the actual potential rate cut would be different because of interactions among the various tax expenditures, interactions between the corporate tax rate and some tax expenditures, and behavioral responses. For one thing, the revenue gain from closing corporate preferences would be smaller at a lower corporate tax rate.
Now, look closer at these tax expenditures. It turns out that the ten most costly provisions benefiting business investment account for about 92 percent of the five-year revenue losses. How likely is it that these costly provisions would be repealed?