One of the most important features of the tax reform plan now under consideration in Congress is the reduction in the corporate tax rate from 35 to 20 percent. This rate reduction is essential to restore long term economic growth and raise the standard of living for all.
The United States now has the highest corporate tax rate in the industrialized world. This high rate encourages companies to move overseas, discourages job-creating investments, and reduces productivity, wages, and economic growth. A new study by the Council of Economic Advisers estimates that a corporate rate reduction to 20 percent could raise average household incomes by $4,000 to $9,000 a year.Despite the overwhelming benefits it will produce for all Americans, history shows that the corporate rate reduction to 20 percent will be difficult to sustain in the face of the coming attacks from hordes of special interest lobbyists. When the House begins it formal consideration of the tax reform legislation, it will release details showing how the rate reductions are offset or “paid for” by closing a long list of special interest carve-outs and loopholes that now benefit a relatively small group of beneficiaries. That is when the biggest threat to tax reform will emerge — an army of lobbyists unleashed to save their special tax breaks and loopholes. Each loophole or tax break saved by the special interests will reduce the revenue needed to get to the 20 percent rate, reduce the economic benefits of tax reform, and curb overall support for tax reform.
This same relentless pressure to save special tax breaks and loopholes almost killed the Tax Reform Act of 1986 before it even made it out of the House. During the House Ways and Means Committee mark up in late 1985, committee members adopted a series of amendments restoring tax breaks for a long list of special interests. These amendments lost billions of dollars, and forced the committee to increase the proposed new corporate rate from 33 to 38 percent, much to the dismay of the Reagan administration and tax reform supporters.With tax reform on the verge of dying, President Ronald Reagan had to make an unprecedented trip to Capitol Hill to urge rebelling Republicans not to kill the bill, which he promised he would “fix” in the Senate and restore the rate cuts.Congress can avoid this threat to tax reform by adopting one simple procedural rule to protect tax reform from the loophole lovers of Gucci Gulch.When the House Ways and Means Committee begins its mark up of the tax reform bill, it should adopt a rule requiring all amendments to the bill to be revenue-neutral. Any amendment to restore a special tax break has to be paid for by removing another tax break. If a member wants to help one special interest, that member must find another special interest to pay for it.The Ways and Means Committee failed to adopt this rule in late 1985, and tax reform came close to collapsing. Without it, special interest provisions will be easier to restore, and the tax rate will creep up to unacceptable levels.This procedure will make it more difficult to restore special carve-outs that benefit the few and protect the rate cuts that benefit everyone. Bruce Thompson is a contributor to the Washington Examiner’s Beltway Confidential blog. He is a consultant in Washington. During the Reagan administration, he was Assistant Secretary of the Treasury for Legislative Affairs.
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