Today on Bloomberg TV, I will be discussing the proposal, I believe live, on the show "Taking Stock with Pimm Fox," which airs starting at 5 pm. But the following offers far more detail than I am likely to be able to squeeze in on-air.
The basic idea is to lower the corporate rate from 35% to 28% - and to 25% for domestic manufacturers - but to raise revenue overall. The net revenue increase would be used to pay for a new "growth and jobs" package involving infrastructure outlays and job training.
The Republicans, of course, have already rejected the plan. Now, while this is simply what they always do with White House proposals - even those that are 99.5% based on Republican rather than Democratic ideas - this time around they actually have a point. The plan really isn't much of a compromise as a policy matter. Enacting a net tax increase on business, in order to pay for infrastructure and job training, is not much of a nod towards current Republican policy preferences, even though they'd get the corporate rate cut. But then again, as there's no chance they would have considered accepting an actual compromise," one can hardly be surprised about this. At some point you need a track record of bargaining in good faith, in order to induce others to bargain with you in good faith.
Cribbing from a recent Jane Gravelle paper, I'll go back of the envelope here and guesstimate a more than $1 trillion revenue loss over 10 years just from the proposed rate cuts, if enacted without base broadening. But a package that raises net revenue, at least over the next 5 to 10 years, and in great enough amounts to finance the infrastructure and job training, clearly is possible here.
The proposal remains sketchy, at least so far as anything that I have been able to find on-line is concerned. It's probably meant to remain that way at least for now, both to avoid being pinned down and to leave open hypothetical room for negotiation over the details. But the big revenue-raisers that might be contemplated appear to include at least the following (each followed by a brief comment):
--Reduce depreciation deductions. OK, I don't like accelerated depreciation in the current Code insofar as (a) it creates inter-asset biases, since not all assets get the same treatment, and (b) it can create better-than-expensing results when paired with interest deductibility. But lowering the rate plus scaling back depreciation combines a windfall gain for old investment (which got accelerated depreciation deductions at the higher pre-enactment rate) with reducing the impetus for new investment.
--Scale back interest deductions for companies. Here we'd need more detail, but interest deductibility does indeed create big problems, such as its creating tax bias in favor of debt over equity. This bias may have contributed to the severity of the 2008 financial crisis.
--Enact a 25% minimum tax on US companies' global income. While I certainly like the idea of aggressively addressing base erosion and profit-shifting to tax havens, this is a very flawed way of doing it. The problem is that one can wholly avoid paying tax to the US under this proposal, by simply paying it to other countries instead. We don't really benefit from encouraging US companies to plan their way down to a global tax rate of exactly 25%, out of which we may get zero or close to it.
--Enact a one-time "transition tax" on US companies' unrepatriated foreign earnings. I may have been the first person to argue in writing for doing this. (See here.) But note that, if we are using this proposal to pay for a rate cut, based on revenue estimates over a limited time window, one may actually be losing revenue over the long run. Outside the estimating window, revenue loss from the rate cut continues out into the future, while the one-time pay-for is done and gone.
What about the proposed corporate rate cut itself? At present, our statutory tax rate (the official 35% rate in the Internal Revenue Code) is very high by global standards. Peer countries' rates are mostly below 30% and in many cases below 25%. But we are much more middle of the road in terms of EFFECTIVE tax rates - that is, in the percentage of income our companies actually pay to us in taxes. Here a typical figure, both for us and peer countries, is in the range of 20 to 25% (again, cribbing from the Gravelle paper). Now, there is of course often a good case for lowering the rate and broadening the base. But even apart from the question of whether one is actually fully financing it over the long-run when it has one-time pay-fors, here are a few issues to keep in mind:
--Lowering the corporate rate, while keeping the individual rate in place, can make the use of corporations a tax shelter for high-income owner-employees. The basic trick is to have one's highly profitable incorporated business pay one a very low salary, which doesn't matter economically if one own enough of the stock. The corporation in effect pays tax on the underpaid salary by proxy, if it isn't otherwise tax-sheltering, since it doesn't get the salary deductions, but this only happens at the low corporate rate. Then, at death, one's kids inherit the stock with a stepped-up basis, and thus they will never have to pay tax on the stock appreciation during one's lifetime. So the tax benefit is permanent.
--Two giveaways in the proposed package that I don't like are (a) the 25% domestic manufacturing rate - why this fetish about "manufacturing"?, and (b) a proposal of small business tax cuts. These might address the base-broadening point directly above, but the targeting wouldn't necessarily be a great match. On the other hand, a proposal to make permanent the research and development tax credit would at least end the farce (and campaign fund-raising bonanza for members of the Congressional tax committees) of repeatedly extending the credit for just a couple of years at a time. On the merits, I am somewhat agnostic about the R&D credit because, while one can make positive-externality arguments about some activity that we might label "R&D" in an economic model, it's not clear how great a match we get in practice.