President Donald Trump’s expected call to slash the corporate tax rate to 15% — a number that many economists say would boost the deficit so much that the cut would be short-lived — may be less about policy and more about deal-making.
“Is this an opening, somewhat unrealistic gambit to a negotiation?” asked James Sweeney, who leads the US economics team and co-heads the global strategy and economics team at Credit Suisse. “And the broader economics — what are the other components to tax reform? We’d be silly to pencil in the 15% rate and adjust our expectations accordingly.”
As a candidate, Trump portrayed his tax plan — which included the 15% tax rate for Corps — as more a bargaining position than a policy prescription. “When I’m negotiating with the Democrats, I’m putting in a plan,” he told ABC News last May. “I’m putting in my optimum plan. It’s going to be negotiated. It’s not going to stay there.”
If that’s still how President Trump thinks, then his administration was scheduled to make its opening bid on taxes later yesterday — just days ahead of his 100th day in office. White House officials say he’ll offer a list of principles — and those that have surfaced so far bear a striking resemblance to the plan Trump pitched as a candidate.
On Tuesday evening, a White House official familiar with the president’s plan laid out a few other pieces of the plan — also familiar to those who followed Trump’s campaign: He wants the same 15% tax rate applied to earnings of so-called pass-through companies, and he wants a 10% tax rate applied to US companies’ stockpiled offshore earnings.
One thing he doesn’t want: a border-adjusted tax, of the type proposed by House Speaker Paul Ryan. Ryan wants to replace the existing 35% corporate income tax with a 20% levy on US companies’ domestic sales and imports. Their exports would be exempt. Trump didn’t intend to include the provision in his proposals later yesterday, said the White House official, who asked not to be named because the discussions are private.
That will probably leave the White House with a major revenue hole in its plan. Ryan’s BAT was estimated to raise more than $1tn over 10 years — revenue that would have helped cover the cost of the business tax cuts. Achieving a revenue-neutral tax plan is important, largely because of rules set up by the US Senate to bypass that chamber’s normal requirement for legislation to have 60 votes. Trump’s Republican party controls only 52 of the Senate’s 100 seats.
If Senate leaders are unable to muster 60 votes for a tax bill, they could still pass one with a simple majority — but only if the legislation didn’t add to the federal deficit outside the normal 10-year window that lawmakers apply to budget legislation.
Representative Adam Kinzinger, an Illinois Republican, said passing tax legislation would be more difficult than overhauling health care, requiring a compromise between the plans proposed by Congress and the White House.
“Of course the White House is going to have their view of it,” he said yesterday on MSNBC. “The two will get married together at some point. It probably won’t look like either of ours in total but hopefully it will be something that will put a little jet fuel in the economy.”
For cuts of the size Trump envisions, that most likely means they’d have to be temporary, and perhaps very short-lived. On Tuesday, the congressional Joint Committee on Taxation said in a letter to Ryan that a corporate tax rate of 20% — five percentage points higher than Trump has proposed — would create deficits in the long run even if it remained in effect for just three years.
Foreshadowing that finding, Ryan’s chief tax counsel, George Callas, told a banking conference in Washington last week that Congress might have to limit a corporate tax rate cut to just two years — if it was part of a plan that didn’t achieve revenue neutrality.
Such a temporary cut would have no effect on business decisions, he said. “It would not cause anyone to build a factory,” he said. “It would not cause anyone to restructure their supply chain.”
It wouldn’t even cause much joy in corporate America, said Albert Liguori, an international tax lawyer and managing director at corporate strategy and turnaround firm Alvarez & Marsal.
“Businesses would rather see the certainty of permanency and be more certain that a tax bill will be passed,” Liguori said. “The 20% range — companies would be more than happy with that because it’s reliably in line with other countries.”
Treasury Secretary Mnuchin has said that Trump’s tax cuts would be revenue neutral — in part because they’d lead to rapid economic growth that would help boost federal revenue. Trump would use such dynamic scoring — that is, accounting for economic changes caused by his plan — to evaluate the revenue effects, Mnuchin said. But even with resulting growth, economists of all stripes say there’s little chance that Trump’s proposed 15% rate, absent the $1.1tn that BAT would raise to underwrite rate cuts, could be revenue neutral.
Trump expressed his frustration with recent economic growth rates yesterday, saying that trade deficits were to blame.
“The US recorded its slowest economic growth in five years (2016),” Trump tweeted. “GDP up only 1.6%. Trade deficits hurt the economy very badly.”
Another leaked provision of Trump’s plan, the 15% rate for pass-through businesses, creates its own challenges. The tax would apply to small businesses, hedge funds and Trump’s own business empire — firms that organise themselves as partnerships or limited-liability companies. Under current law, those companies pass their earnings and deductions through to their owners, who are then taxed at their individual income-tax rates. The highest such rate is 39.6%.
Under Trump’s plan, high-earning individuals would have a keen incentive to turn themselves into companies for tax purposes — to take advantage of the lower rate. Trump’s campaign advisers said they’d work with Congress to figure out a way to prevent that. There’s also the revenue effect of making the change; Roberton Williams, a tax expert at the Urban-Brookings Tax Policy Center, said the pass-through provision alone could increase the deficit by hundreds of billions of dollars.
The repatriation-tax proposal, on the other hand, would be a revenue-raiser — but it’s unclear whether it’d be a one-time event or one that would carry forward.
The tax represents an attempt to reconcile a quirk of the US tax system. Unlike most developed nations, the US applies its 35% corporate income tax to companies on their global earnings, not just their US income. But companies can defer taxes on their overseas profits until they decide to return those earnings to the US, or “repatriate” them. During his campaign, Trump spoke of ending such deferral, but it’s unclear whether he intends to stick to that plan now.
In their eagerness to defer US taxes, companies have stockpiled an estimated $2.6tn offshore — though Trump has said repeatedly he believes the number is far higher. Ryan and House leaders have their own version of a repatriation tax also — they’d impose an 8.75% rate on earnings held offshore as cash or cash equivalents and a 3.5% rate on earnings that have been invested otherwise.
A final tax package is bound to be the result of compromise. Some CEOS are eager for that deal-making to get under way — even if it means deficits.
“The signal from the administration this year that they’re willing to accept a higher deficit in the near term in order to get tax reform through makes sense and I support it,” AutoNation chairman and chief executive Michael Jackson told Bloomberg News.