U.S. President Donald Trump looks on during a meeting with the National Association of Manufacturers in the Roosevelt Room of the White House March 31, 2017 in Washington, DC.
Pool

The problem with Trump’s massive corporate tax cut

Updated
With Donald Trump’s presidency nearing its 100th day, the White House is, by all appearances, feeling a little antsy about its lack of accomplishments. It’s one of the reasons Team Trump is scrambling this week to fund the government without a shutdown, push Republicans on health care, and unveil some vague ideas about tax policy.

We’ll reportedly see some kind of tax blueprint tomorrow, but in the meantime, the Wall Street Journal reports on one of the president’s top new priorities.
President Donald Trump has ordered White House aides to draft a tax plan that slashes the corporate tax rate to 15%, even if that means a loss of revenue, according to people familiar with the directive.

During a meeting in the Oval Office last week, Mr. Trump told staff he wants a massive tax cut to sell to the American public, these people said. He told aides it was less important to him that such a plan could add to the federal budget deficit, though that might make it difficult to sell to GOP lawmakers who are wary of such a large tax cut.
It’s worth pausing to note that the idea of congressional Republicans prioritizing the deficit over tax cuts is very hard to believe. GOP interest in balanced budgets has long been a ridiculous sham, used primarily as an excuse to reject popular Democratic priorities.

But even putting that aside, the White House’s proposed corporate tax cut – lowering the rate from 35% to 15% – is worth paying close attention to. In fact, I heard from a Republican reader last night who made two points that we’re likely to hear quite a bit: (1) the United States has one of the highest corporate tax rates in the world, so in the name of competitiveness, a reduction is necessary; and (2) President Obama proposed cutting the corporate tax rate, too, so there’s no reason to see this as a purely partisan endeavor.

Do these points have merit? Not exactly.

Let’s circle back to our coverage from several years ago, when Obama proposed lowering corporate tax rates to 28%. On paper, the fact that the United States has a 35% rate seems rather high, but thanks to a series of loopholes and tax giveaways, plenty of corporations pay a rate much lower than that – and some end up paying nothing at all.

The resulting structure is a mess: we have relatively high rates, but collect less revenue because the code is filled with enough holes to resemble Swiss cheese. When Obama proposed lowering the corporate tax rate to 28%, his plan was predicated on the idea of eliminating loopholes and giveaways, getting corporations to start paying the taxes they’re avoiding now. The boost in revenue would make a cut affordable.

What often gets lost in the debate is that we have one of the highest corporate tax rates in the world, but the actual income tax paid by corporations is “one of the lowest in the world.”

The New York Times’ David Leonhardt had a good piece on this a while back, noting not only the loophole-ridden status quo, but also the fact that the system isn’t actually generating the revenue for the treasury it’s supposed to. Among Leonhardt’s findings: about a fourth of the companies included in the S&P 500 pay a total corporate tax rate of less than 20%.

In theory, there’s room for some bipartisan policymaking on this: Republicans want a lower rate; Democrats want a fairer system with fewer loopholes. Both sides could get at least some of what they want.

But that’s never come close to happening, largely because GOP lawmakers have sided with powerful businesses that are desperate to keep the loopholes and giveaways.

With this in mind, when the White House unveils its vision tomorrow, pay attention to the fine print (if there is any to examine). Trump wants a lower rate – a 15% figure he appears to have pulled out of the air because he thinks it sounds good, not because it’s the result of economic analysis or intense number-crunching – but is he prepared to create a system in which corporations actually pay that rate?

I’d recommend skepticism.