Can Cutting Corporate Tax and Revenue Neutrality Coexist?
May 21, 2015
There is universal recognition in Washington that the 35 percent federal corporate tax rate is out of step with America's global competitors and should be lowered at least to 25 percent in order to improve U.S. competitiveness and economic growth. And while there clearly is a need for comprehensive tax reform, many have suggested that lawmakers move forward with corporate-only reform, provided that it be accomplished in a revenue-neutral manner by broadening the corporate tax base.
While corporate-only tax reform may appear to be less complicated and more expeditious than comprehensive reform, there are three reasons to believe that the goal of revenue-neutrality and economic growth are at odds with each other.
- First, those who argue that we should just widen the tax base and lower tax rates greatly overestimate the amount of "loopholes" in the corporate tax code. According to the latest federal budget, there are roughly 80 corporate tax expenditures that have a total budgetary value in 2015 of $118 billion. By contrast, there are roughly 100 tax expenditures in the individual income tax code with a total budgetary value of $1.1 trillion.
- The second complication to corporate-only tax reform is that many corporate tax expenditures are also available to the roughly 33 million pass-through businesses such as S-corporations, partnerships and sole proprietorships.
- The third challenge to those who insist on revenue-neutral corporate tax reform is to find offsets that do not diminish the growth potential of a pure rate cut.
Considering these issues, lawmakers would do well to rethink the self-imposed restriction of revenue neutrality and focus on creating the maximum amount of economic growth, even if that comes at the expense of federal revenues. While there are corporate tax breaks that could be eliminated without dampening the growth effects of the rate cut, there are not nearly enough of these to fund a rate cut on a static basis.
Source: Scott Hodge, "Cut the Corporate Tax, Forget Revenue Neutrality," Real Clear Markets, May 20, 2015.
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