(Bloomberg) President Donald Trump has promised the largest tax cut in history, but for scores of the biggest U.S. corporations, it might be just a tax nick.
Constrained by congressional rules, political concerns and simple arithmetic, Republican leaders in Washington have yet to announce any consensus on how to finance the deep corporate tax cut they want, beyond vague plans to close off business-related loopholes.
But making comparatively narrow changes to the tax code won’t put much of a dent in the 35 percent corporate rate, taking it only as low as 28 percent or so, according to three tax experts who’ve run the numbers. That’s almost double the 15 percent rate Trump has proposed and well above the 20 percent that House Speaker Paul Ryan has suggested.
Trump’s White House has promised an agreed-upon plan by early September. But with no details emerging from weekly, closed-door tax meetings between his advisers and congressional leaders, tax professionals and policy analysts have begun to fear that a shallower cut is the most likely outcome. That would jeopardize Trump’s goal of spurring job creation and economic growth, and do little to prevent U.S. companies from shifting their income and tax liabilities offshore to lower-tax countries, economists say.
The rates that Trump and Ryan want are “almost certainly a pipe dream,” said David Rosenbloom, an international tax lawyer at Caplin & Drysdale who served in the U.S. Treasury Department from 1978 to 1981. “They don’t know how to pay for a cut of that magnitude.”
Both men have pitched their rate-cut plans as a way to spur hiring and economic growth. But setting a 28 percent tax rate would be largely meaningless for more than 150 of the largest U.S. companies, which already paid lower rates than that from 2008 through 2015, according to a recent study.
The companies took advantage of features of the tax code that allow for aggressive tax avoidance as well as tax “subsidies,” according to a March 2017 report by the Institute on Taxation and Economic Policy, which gathered data from public disclosures. If Congress does close loopholes to pay for a lower rate, many such breaks would disappear.
“These corporate tax rate cuts appeal to the business community in the abstract, but when you talk about what tax subsidies have to be given up, that changes very quickly,” said Chuck Marr, director of federal tax policy at the Center on Budget and Policy Priorities in Washington.
To be sure, potential revenue-raisers could make their way into final legislation—helping to pay for steeper cuts. Ryan’s controversial border-adjustment concept and his proposal to end the deductibility of corporate interest payments would each raise $1 trillion or more over a decade, but both have run into significant political opposition.
If neither provision survives, the corporate tax cuts that Ryan and Trump have proposed are “unrealistic,” said economist Alan Viard of the American Enterprise Institute.
Temporary Cut
Given the difficulties, Congress could abandon the goal of revenue-neutral tax legislation—but that move would create other issues. To get around a lack of Democratic support, Senate Republicans have said they plan to use a legislative maneuver that allows for passing a bill with a simple majority. Under that procedure, any provisions that would expand the long-term federal deficit would have to be only temporary.
A temporary cut would most likely spur companies to make bigger payouts to shareholders, not hire new workers, said Alan Cole, an economist with the Tax Foundation in Washington. Likewise, a permanent, but shallow, cut wouldn’t send most multinationals on hiring or investing sprees, he said— “though there’s always someone at the margin” that might benefit and reinvest.
Corporate executives aren’t interested in temporary changes. The Business Roundtable, a lobbying group made up of chief executive officers, wants “permanent, fundamental reforms that will accelerate growth big time and boost all Americans,” said Matt Miller, a vice president for the organization.
Similarly, Ryan’s office said in a statement Thursday that a temporary rate cut could actually result in economic decline rather than growth.
Some members of Congress have proposed a way to extend the life of temporary cuts—by changing congressional rules to expand the “budget window” that applies to deficit-increasing provisions from the current 10 years to as many as 30. Such a move comes with procedural challenges and political risks, according to budget experts.
Magic Number
From an international perspective, the magic number for the U.S. corporate tax rate to hit is roughly 24 percent—about the average rate among countries in the Organisation for Economic Co-operation and Development, said Elaine Kamarck, a senior fellow at the Brookings Institution.
Getting below that number would help persuade U.S. companies to stop shifting profits offshore, said Kamarck, a co-chair of the RATE Coalition, a tax-focused group whose members include Aetna Inc., Boeing Co., Raytheon Co. and Wal-Mart Stores Inc.
The U.S. is the only industrialized country that taxes its companies on their global profits, no matter where they’re earned. But the federal tax code allows companies to defer paying taxes on overseas income until those earnings are brought home to the U.S. The deferral rule has helped result in U.S. companies’ shifting profit to their overseas subsidiaries in low-tax countries—often through debt transactions or intellectual-property licensing deals—and leaving it there. In all, U.S. multinationals have amassed an estimated $2.6 trillion in untaxed, offshore profit.
Simply cutting the corporate tax rate wouldn’t address the structural incentives for such profit-shifting, but Ryan argues that the border-adjusted tax plan would. Instead of trying to tax companies’ global income, it would more closely resemble a tax on their U.S. sales—reducing the incentives to send profit offshore, proponents say. Still, some experts have questioned whether the change would end the practice fully.
During an address that his office billed as Ryan’s first major tax speech last week, he suggested that he remains committed to trying to prevent the offshoring of both corporate income and jobs. “The bottom line here is this: We cannot accept a system that perpetuates the drain of American businesses overseas,” he said.
2012 Plan
Trump has been far less vocal about structural changes—or finding ways to pay for deeper cuts. The one-page outline that his administration released in April made an oblique call for eliminating “tax breaks for special interests” and “targeted tax breaks that mainly benefit the wealthiest taxpayers.”
Eliminating 54 corporate tax breaks currently embedded in the tax code—such as domestic-production deductions and low-income housing credits—would generate enough revenue to cut the corporate rate to 28.5 percent, according to Scott Greenberg, a senior analyst at the Tax Foundation.
That figure squares with efforts made during former President Barack Obama’s administration. Treasury Department officials found in 2012 that the lowest rate they could propose without adding to the deficit was 28 percent, said Mark Mazur, a former top tax official in the department.
For multinationals, 28 percent “is not something they’d say, sign me up for that,” said Mazur, now the director of the Urban-Brookings Tax Policy Center.
Caplin & Drysdale’s Rosenbloom agreed. “I suspect that a 28 percent rate will please no one,” he said. And of the talks underway in Washington, his view was dimmer still: “When all is said and done, there’s a lot more said than done.”
