A great bipartisan idea. Too bad that D.C. Is so broke that this will never see the light of day.
A Bipartisan Plan to Cut Corporate Taxes
How to reduce the rate to a flat 15% without widening the budget deficit.
William A. GalstonOct. 31, 2017 6:06 p.m. ET
Photo: iStock/Getty Images
By
William A. Galston
I wonder if Republicans on the House Ways and Means Committee are interested in a bipartisan plan that reduces the corporate tax rate to 15%, makes the code more progressive, doesn’t deepen the deficit, and is carefully scored?
Last year, Eric Toder from the Tax Policy Center, an outfit many Republicans don’t like, and Alan Viard from the American Enterprise Institute, an outfit many Republicans do like, presented such a proposal. The current code, say Messrs. Toder and Viard, is outdated because it has failed to adjust to four major changes in the economic and policy environment: “(1) the increased globalization of economic activity, (2) corporate tax rate reductions in other countries and their shifts to territorial tax systems, (3) the increased share of business assets in the form of intangible property, and (4) the increased share of economic activity in the United States not subject to the corporate income tax.”
In agreement with most tax experts, Messrs. Toder and Viard believe that the current corporate code has given U.S. multinational corporations strong incentives to accumulate as much as $2.4 trillion in profits overseas. In addition, U.S.-based multinationals find it easy and profitable to transfer ownership of their intangible assets to their overseas affiliates while crediting the earnings on these assets to jurisdictions with tax rates lower than ours.
Even if the U.S. economy were closed to international trade and investment, Messrs. Toder and Viard add, the current corporate tax code still would be structurally flawed. For example, it penalizes equity-funded corporate investment relative to debt-financed investment. Debt-financed investments are taxed only at the individual level (as are investments by pass-through entities), while equity-financed investment is taxed at the corporate level as well. Moreover, dividends are taxed when they are received, while capital gains are taxed only when realized, and in some circumstances not at all.
To alleviate these problems Messrs. Toder and Viard propose some fundamental reforms. They would eliminate the current tiered corporate tax system, with its top rate of 35%, replacing it with a flat tax of 15%. They would also scratch the corporate alternative minimum tax. These changes, they demonstrate, would dramatically improve the incentives for both Americans and foreigners to invest in the United States.
To avoid massive revenue losses to the Treasury, they would shift most of the tax burden to shareholders. Their proposal would tax dividends and capital gains at ordinary income rates. And to eliminate the imbalance between dividends, taxed when received, and capital gains, taxed only when realized, they would move to a mark-to-market system, with prices averaged (“smoothed”) over a number of years to reduce high volatility. To reduce administrative costs and disproportionate compliance burdens, they would exempt small-asset holders from mark-to-market taxation.
To avoid double taxation, shareholders would receive a tax credit reflecting their share of taxes paid at the corporate level. This would prevent the windfall gains that tax-exempt organizations and retirement funds would otherwise enjoy under this approach. In addition, the authors work through the complex transition issues that real-world tax-writing committees must address. It would be easy to turn their proposal into legislation.
Americans would benefit in several ways. A substantial portion of multinationals’ profits stashed overseas would be available for domestic purposes. Foreign holders of capital would be more likely to invest in the United States. Many distortions in the current code would be reduced or eliminated, allowing economic fundamentals rather than tax advantages to shape individual decisions. A portion of the gains from the rate cut (Messrs. Toder and Viard do not specify the share) would go to income from labor. Taxpayers in the top 1% would see a modest increase in their tax burden while everyone else would enjoy a modest decrease.
Evaluated on a static basis, the proposal would slightly reduce corporate tax receipts. But because corporations would almost certainly shift a portion of their profits from formerly lower-tax jurisdiction back to the United States, broadening the tax base, receipts would increase from an estimated $28 billion in 2018 to $51 billion in 2025, reducing the deficit relative to current law.
In their proposal, Messrs. Toder and Viard leave most corporate tax preferences as they are. This has a political advantage they do not mention: They can slash the corporate tax rate without attacking the most fiercely protected provisions of the current code or widening the budget deficit, which is projected under current law to add $10 trillion to the debt over the next decade.
Congressional Republicans, the ball is in your court.
Appeared in the November 1, 2017, print edition.
A Bipartisan Plan to Cut Corporate Taxes
How to reduce the rate to a flat 15% without widening the budget deficit.
William A. GalstonOct. 31, 2017 6:06 p.m. ET
Photo: iStock/Getty Images
By
William A. Galston
I wonder if Republicans on the House Ways and Means Committee are interested in a bipartisan plan that reduces the corporate tax rate to 15%, makes the code more progressive, doesn’t deepen the deficit, and is carefully scored?
Last year, Eric Toder from the Tax Policy Center, an outfit many Republicans don’t like, and Alan Viard from the American Enterprise Institute, an outfit many Republicans do like, presented such a proposal. The current code, say Messrs. Toder and Viard, is outdated because it has failed to adjust to four major changes in the economic and policy environment: “(1) the increased globalization of economic activity, (2) corporate tax rate reductions in other countries and their shifts to territorial tax systems, (3) the increased share of business assets in the form of intangible property, and (4) the increased share of economic activity in the United States not subject to the corporate income tax.”
In agreement with most tax experts, Messrs. Toder and Viard believe that the current corporate code has given U.S. multinational corporations strong incentives to accumulate as much as $2.4 trillion in profits overseas. In addition, U.S.-based multinationals find it easy and profitable to transfer ownership of their intangible assets to their overseas affiliates while crediting the earnings on these assets to jurisdictions with tax rates lower than ours.
Even if the U.S. economy were closed to international trade and investment, Messrs. Toder and Viard add, the current corporate tax code still would be structurally flawed. For example, it penalizes equity-funded corporate investment relative to debt-financed investment. Debt-financed investments are taxed only at the individual level (as are investments by pass-through entities), while equity-financed investment is taxed at the corporate level as well. Moreover, dividends are taxed when they are received, while capital gains are taxed only when realized, and in some circumstances not at all.
To alleviate these problems Messrs. Toder and Viard propose some fundamental reforms. They would eliminate the current tiered corporate tax system, with its top rate of 35%, replacing it with a flat tax of 15%. They would also scratch the corporate alternative minimum tax. These changes, they demonstrate, would dramatically improve the incentives for both Americans and foreigners to invest in the United States.
To avoid massive revenue losses to the Treasury, they would shift most of the tax burden to shareholders. Their proposal would tax dividends and capital gains at ordinary income rates. And to eliminate the imbalance between dividends, taxed when received, and capital gains, taxed only when realized, they would move to a mark-to-market system, with prices averaged (“smoothed”) over a number of years to reduce high volatility. To reduce administrative costs and disproportionate compliance burdens, they would exempt small-asset holders from mark-to-market taxation.
To avoid double taxation, shareholders would receive a tax credit reflecting their share of taxes paid at the corporate level. This would prevent the windfall gains that tax-exempt organizations and retirement funds would otherwise enjoy under this approach. In addition, the authors work through the complex transition issues that real-world tax-writing committees must address. It would be easy to turn their proposal into legislation.
Americans would benefit in several ways. A substantial portion of multinationals’ profits stashed overseas would be available for domestic purposes. Foreign holders of capital would be more likely to invest in the United States. Many distortions in the current code would be reduced or eliminated, allowing economic fundamentals rather than tax advantages to shape individual decisions. A portion of the gains from the rate cut (Messrs. Toder and Viard do not specify the share) would go to income from labor. Taxpayers in the top 1% would see a modest increase in their tax burden while everyone else would enjoy a modest decrease.
Evaluated on a static basis, the proposal would slightly reduce corporate tax receipts. But because corporations would almost certainly shift a portion of their profits from formerly lower-tax jurisdiction back to the United States, broadening the tax base, receipts would increase from an estimated $28 billion in 2018 to $51 billion in 2025, reducing the deficit relative to current law.
In their proposal, Messrs. Toder and Viard leave most corporate tax preferences as they are. This has a political advantage they do not mention: They can slash the corporate tax rate without attacking the most fiercely protected provisions of the current code or widening the budget deficit, which is projected under current law to add $10 trillion to the debt over the next decade.
Congressional Republicans, the ball is in your court.
Appeared in the November 1, 2017, print edition.
