By Lane Bailey and William Tucker
30 days into the Trump Administration and the newly empowered Republican majorities in the House and Senate, few public policy issues have broken through the early chaos to be seen as predictable, even bipartisan, sure things.
Corporate Tax Reform will happen in 2017, and the perimeters of the likely new tax rates are already generally accepted. It’s as certain, though less frequent, than the 17-year locust. The last successful corporate tax reform effort was Ronald Reagan’s successful effort in 1986, 31 years ago.
President Trump supports a dramatic cut in the corporate tax rate, from 35% to 15%. He is not as bullish on border adjustment as Republican Congressional leaders, but has indicated that he could pursue an import tax/tariffs of some kind.
All tax bills start in the House of Representatives, as do budgets. The current House Republican plan proposes four major changes to the business income tax base (see: Tax Foundation):
- Businesses would be able to fully expense their capital investments rather than depreciate them over a number of years or decades.
- Businesses would no longer be able to deduct their net interest expense against their taxable income.
- Foreign profits would no longer be subject to domestic taxation.
- The corporate income tax would be “destination-based,” meaning that the plan would make the U.S. income tax border-adjustable.
Both the origin-based tax (taxing exports) we have now and the House GOP proposal for a destination-based tax (taxing imports) are ostensibly trade-neutral tax bases. Both are also neutral for domestic consumption.
Commerce Secretary Steve Mnuchin cites corporate tax reform as the Administration’s number one priority on the road to increased growth.
Companies with a high percentage of revenue from domestic sources and high effective tax rates would stand to gain most from a heavy corporate tax cut, though changes to federal corporate tax expenditures could balance the cuts.
The R&D tax credit is one of the only federal corporate tax expenditures that President Trump has said he will maintain during his Administration.
Admittedly, some Republican Members of Congress have proposed more drastic measures, such as enacting a Flat Tax, abolishing the IRS and adopting a national retail sales tax, and terminating the entire tax code to start fresh.
Before he left office, Barack Obama argued that the statutory corporate tax should be lowered from 35%, but in a revenue-neutral way that also removes or changes corporate tax expenditures. Still, Democrat-affiliated tax organizations argue that the U.S. effective corporate tax rate isn’t truly much higher than that of other developed nations, and has been in decline since it sat above 50% in the ‘50s.
Some democrats advocate for abolishing the deferral of taxes on foreign profits altogether. Senator Ron Wyden (D-OR) has offered one such proposal in 2015.
But, these are arguments around the edges.
Speaker of the House Paul Ryan has said that tax reform is the number two priority for this legislative session, to be achieved through “spring and summer”. Wall Street is expecting tax reform and an unwinding of Obama era regulations on banks and health care companies under Trump and the Republican-led Congress. In addition, there are hopes for a massive stimulus package to help rebuild roads, bridges and other infrastructure. The 2016 election may have drawn sharp contrasts between candidates and parties on almost every issue –many of them deeply divisive.
Corporate taxes is not one of them.
In anticipation the Dow has soared nearly 2,500 points, or 13%, since Donald Trump was elected president of the United States. And the world’s most famous market barometer is up more than 1,000 points, or 5%, in just the past month — after Trump was inaugurated. Investors are clearly giddy. Just as Brood VI of the Locust emerge in Northern Georgia. Bank on it.