Now is not the time for Republican tax writers to rest on their 2017 laurels.
Now is not the time for Republican tax writers to rest on their 2017 laurels.
T he crown jewel of the 2017 Tax Cuts and Jobs Act (TCJA) was the generational reform to the corporate income tax. The United States had the highest rate in the world, at 35 percent plus state income taxes. It was higher than all our major trade partners (Canada, Mexico, the United Kingdom, the EU countries, and Japan), and was much higher than China’s tax rate. Headlines every day announced new corporate inversions, in which U.S. companies got acquired by foreign ones in order to pay taxes in friendlier countries. Jobs and capital were constantly getting shipped overseas and staying there.
TCJA cut the U.S. corporate income tax rate from 35 percent to 21 percent, right in line with the developed nation average. New rules prevented tax avoidance in tax havens while simultaneously eliminating double taxation, and nearly $3 trillion of overseas cash returned home to America. We haven’t had a corporate inversion since.
By FY 2022, corporate tax revenues reached a record high of $425 billion — 43 percent higher than before TCJA was passed, and $72 billion more than the non-partisan Congressional Budget Office anticipated. All this new revenue came in despite a massive cut in the tax rate from 35 percent to 21 percent. Corporate tax reform worked.
Next year’s Republican Congress and President-elect Donald Trump have an opportunity to stay on offense on the corporate tax side. The world hasn’t stopped since 2017. Other countries have responded to our lower corporate tax rate by lowering their own. France has cut its corporate income tax rate from 34 percent to 25 percent. The developed nation average corporate tax rate (including states) has declined to 21.1 percent, compared to our 2017-era 25.6 percent. We’re once again higher than the going worldwide tax rate. Our combined federal-state corporate income tax rate is higher than that of China or the United Kingdom. Canada and France are only just above us.
Since TCJA passed, the higher-tax countries of Europe have fought to impose a 15 percent global minimum tax on the world. Congressional Democrats and President Biden created a “corporate alternative minimum tax” of 15 percent.
The TCJA effective minimum tax rate on American companies doing business in low tax countries (GILTI and BEAT) are scheduled to rise in 2026 unless there is a cut to the headline corporate income tax rate. The GILTI rate (a minimum tax paid to the IRS when a foreign country’s corporate income tax rate is zero or very low) is scheduled to rise from 13.1 percent to 16.4 percent. The BEAT rate (a kind of “exit tax” paid when a U.S. company shifts assets to lower tax countries) is scheduled to increase from 10 percent to 12.5 percent. The U.S. corporate income tax rate is a variable in the complex pre-algebra equation used to calculate the GILTI and BEAT minimum taxes, so a lower U.S. corporate headline rate automatically prevents a tax increase on these international tax activities.
Hiking the GILTI and BEAT rates too much could make corporate inversions more attractive again, since simply moving to the lower tax country at some point becomes more attractive than paying ever-higher minimum taxes to the IRS on top of whatever tax is paid overseas. Stopping jobs and capital from being shipped to foreign countries was one of the best outcomes of TCJA, but the corporate inversion zombie could rise from the dead if higher U.S. tax rates on profits earned abroad are enacted
The full business expensing of assets in TCJA passed in 2017 will be 40 percent expensing starting in 2025, then 20 percent expensing in 2026, then only lengthy and complex depreciation tables again starting in 2027. Research expenses, which are mostly wages, now have to be deducted over five years even if the expense was paid in the first year. Companies that borrow to invest now get to deduct less business interest from their taxable income than identical companies that borrow to consume.
Things have gotten worse for corporations since the heyday of TCJA passage at this time seven years ago, and are teed up to get even worse still. Global threats are rising, both from friendly and less friendly trading partners. Populism and anti-CEO mania has seized both parties. The corporate-tax base is much less pro-growth. The old adage “a good defense is a good offense” would seem to apply, even if a corporation is content with the headline tax rate of 21 percent.
President-elect Trump realizes this, which is why he ran on permanently lowering the federal corporate income tax rate from 21 to 15 percent. He’s also supportive of permanent full business expensing, permanent research expensing, and permanent interest parity for capital intensive companies. Doing so would result in an immediate cut in our combined federal-state rate from 25.6 percent to 20.8 percent, just below the OECD average and once again putting us ahead of all our trade rivals.
If Trump follows through on tariff threats, corporations will need a lower tax rate to combat the negative economic effects. A lower tax rate is also necessary to blunt the impact of tax hikes on U.S. companies doing business abroad, lest inversion make an unwelcome comeback. A 15 percent federal rate would call the bluff of the globalist minimum taxers, beating them at their own game.
There’s a lot of momentum among tax writers to eliminate the ability of all companies to deduct their state and local taxes (SALT), similar to a restriction faced by individuals, as a way to pay for the 15 percent federal corporate tax rate. A lower tax rate would more than make up for this relatively small corporate base broadener, and encourage corporations to move to states with little to no income taxes.
Cutting the corporate income tax rate has direct benefits for middle-class families. Economists agree that a third to half of the benefits of the tax cuts go to labor, not capital (that means more jobs and higher wages). All of us who have 401(k) plans, IRAs, and 529s for our kids would benefit in the form of higher stock prices. Utilities like electricity and water are required to pass the savings from a corporate tax cut onto consumers. Seniors who rely on dividends for retirement income should see a boost to payouts. And we all benefit from faster economic growth. Corporations don’t pay taxes, after all, being pieces of paper in filing cabinets — people do.
Now is not the time for GOP tax writers to rest on their 2017 corporate tax reform laurels. There is more work to be done, and permanent corporate tax reform needs to be a part of budget reconciliation next year. The federal corporate tax rate must be reduced to 15 percent.