President Trump’s corporate tax reform plan doesn’t have much in the way of details, but it does have the right general shape. It slashes rates, closes loopholes and ends our perverse worldwide tax system.
A reform following these general guidelines will reduce the distortions caused by a complex and costlier code, increase the competitiveness of American firms, encourage overseas businesses to come to America and homegrown ones to stay here, and free up capital for innovation and job creation.
The current 35 percent federal tax rate on corporate profits, plus average state taxes, mean business pay a combined rate of nearly 40 percent, the highest in the world.
Other countries, including our top trade partners, have cut their corporate income taxes aggressively in recent decades.
Britain cut its top rate from 30 percent to 20 percent in the past decade. Canada, between 2000 and 2012, dropped its rate even more, from 28 percent to 15 percent. The worldwide average was about 30 percent in 2003, according to the Tax Foundation. Today it’s 22.5 percent.
The U.S. is massively and debilitatingly out of line.
Liberals’ beloved retort that businesses’ actual effective rate of 20 percent is much the same as everywhere else, couldn’t be less convincing.
The gap between the marginal rate and the effective rate indicts our system rather than exculpates it. One way companies get their effective tax rate from 35 or 40 percent down to the 20s is to find loopholes, contort their businesses and generally game the code. This accounting chicanery represents dead-weight loss, and the contortions amount to real inefficiencies that reduce employment and productivity. Behind it all is a complexity that chews up resources and time and intimidates smaller companies.
A lower rate with fewer loopholes reduces incentives for businesses to play these games, letting them turn their attention to creating value by providing people with what they want at a good price. Just the lower rate will free up billions of dollars in capital for companies to invest in equipment, software and people.
The Tax Foundation estimated last year that all income quintiles would see a 4 percent increase in income due to the stimulative effects of such a cut.
Trump would also go after worldwide taxation, which is one of the most perverse parts of our tax code. Uncle Sam claims the right to tax all the income a company earns if the company is based in the U.S. Companies don’t have to pay taxes on that money if they don’t bring it back home.
The system might be built for the express purpose of depressing American business. It pays companies to keep earnings overseas and punishes them for having headquarters here.
Trump’s plan calls for an end to this absurdity.
Because the White House tax plan is bare bones (both the individual tax reform and the corporate reform, combined, fit on one piece of paper) Congress should see it as a framework or baseline. Republican leaders called it a “guidepost.” The heart of it is a 15 percent rate combined with a simpler code.
This framework could result in a straightforward reform that leaves the basic current structure in place, just lower and simpler. But Trump’s basic ideas could also be the foundation of a more serious and wide-ranging overhaul.
Tax scholars Eric Toder and Alan Viard have built a tax overhaul around a 15 percent rate, and it involves an extreme makeover of the tax code. The Toder-Viard reform would reduce the preference for corporations to borrow (as opposed to raising capital in other ways) and reduce the incentive for companies to jump overseas.
Donald Trump certainly wasn’t elected on a campaign of cutting and simplifying corporate taxes. It may not be the kind of issue to fire up the base. But corporate tax reform is good government, and Trump has made a good start.
