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April 26, 2017 at 07:24 AM
President Donald Trump’s 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 U.S. 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 corporations — 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 is scheduled on Wednesday to make its opening bid on taxes — 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 U.S. companies’ stockpiled offshore earnings. Treasury Secretary Steven Mnuchin confirmed the plan’s 15% rate for corporations and small business during an event in Washington on Wednesday morning.
Ryan’s Plan
One thing Trump 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 U.S. companies’ domestic sales and imports. Their exports would be exempt. Trump doesn’t intend to include the provision in his proposals Wednesday, said the White House official, who asked not to be named because the discussions are private.
Ryan said Wednesday that even the BAT’s backers agree “it needs to be modified.” Regarding Trump’s plans, he said: “We’ve seen a sneak preview of it, we like it a lot, we’re on the same page” with about 80% of the items on Trump’s list. “At the end of the day, where we all agree is we want the most internationally competitive tax system,” he said.
Eliminating or modifying the BAT would probably leave a major revenue hole in any tax plan. The tax was estimated to raise more than $1 trillion 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 U.S. 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 Wednesday 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.”
Three Years
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.
