A report from the chief congressional scorekeeper casts doubt on Republican efforts to cut the corporate tax rate to 25 percent without increasing the U.S. budget deficit or shifting the cost to other taxpayers.
Scrapping almost every existing corporate tax break -- including those for domestic manufacturers, the energy sector and accelerated write-offs of equipment -- would generate enough revenue to lower the corporate rate to 28 percent, according to the congressional Joint Committee on Taxation. The estimate was requested by Democrats on the House Ways and Means Committee.
The analysis is being circulated one week after Ways and Means Chairman Dave Camp, a Michigan Republican, released the first slice of a proposed comprehensive rewrite of the U.S. tax code. Democrats say the estimate reflects the difficult choices Republicans must make to cut the top corporate tax rate by 10 percentage points to 25 percent, which is Camp’s goal.
“The Republican tax plan would require wiping out every provision in our tax code that encourages domestic job creation, investment and innovation -- and they are still 3 percent short of their goal,” Representative Sander Levin of Michigan, the top Democrat on the Ways and Means panel, said in an e-mail.
Camp spokeswoman Michelle Dimarob in a statement today criticized Levin’s support for tax increases and “blatant opposition to tax reform.”
“His latest political stunt -- asking a very narrow question which he knows well will yield a very narrow response - - is just another in his ongoing attempts to detract from the serious work being done on a bipartisan, bicameral basis to reform our tax code so that employers can create jobs for American workers,” she said in the statement.
Clint Stretch, the managing principal of tax policy at Deloitte Tax LLP, said the report shows the hard numbers behind an assumption widely held by tax professionals.
“This is an explicit statement of the reality that everybody’s known: that this is not an easy thing to do,” he said. “You’ve got to reverse decades of long-standing tax policy to get to this lower rate, and it’s going to be painful to people who really rely on present-law incentives.”
Reducing the corporate tax rate to 28 percent would result in $717.5 billion in forgone revenue to the U.S. Treasury over 10 years, plus $243 billion more in unspecified “interactions” among the provisions, according to the joint tax committee’s analysis. The committee considered only the effects of ending benefits for businesses that are structured as corporations.
In the fiscal year that ended Sept. 30, the federal government collected $181 billion in corporate income taxes. That was 7.9 percent of total revenue.
Lawmakers can gain back some of that revenue by repealing the priciest provisions in the corporate tax code. Eliminating depreciation benefits for capital investments, such as equipment, would generate $506.8 billion over a decade. Scrapping deductions for domestic production activities would net $127 billion and repealing the last-in, first-out method of accounting would produce $62.7 billion in revenue.
In a letter that accompanied the analysis, Thomas Barthold, the Joint Committee on Taxation’s chief of staff, warned that the results are “very preliminary.”
“We continue to upgrade our models relating to corporate tax reform,” he wrote. Reducing the corporate rate to 25 percent without expanding the budget deficit or affecting other taxpayers would require Camp to find at least an additional $300 billion over the next decade, the joint committee report suggests.
To get there without shifting money from individuals or businesses that don’t pay taxes under the corporate structure, he could look beyond itemized tax expenditures to other features of the tax code. For example, Stretch said, he could propose disallowing deductions that would otherwise be considered normal business expenses. The tax code already does this for some executive compensation.
“I don’t think there are a lot of them, and none of them are easier than the list you’re looking at,” Stretch said.
Camp also could curtail the deductibility of interest, which some analysts say encourages companies to borrow heavily. His committee and the Senate Finance Committee held a joint hearing on the interest deduction this year.
Another approach for Camp could be to exploit or change the scoring rules used by the joint committee. Because some tax breaks, such as the research and development tax credit, are already scheduled to expire, the panel doesn’t score eliminating them as revenue-raisers.
Also, the joint committee uses a 10-year scoring window, so any approaches that push revenue-losing measures into future years -- such as a phased-in rate reduction -- would reduce the need for base broadening.
Barthold said the estimate will change once more details on a corporate tax overhaul are available. For instance, the analysis doesn’t consider the effect of transition rules, which would be required if lawmakers agree to repeal items such as the last-in, first-out accounting method. Moreover, the estimate doesn’t predict the revenue effects of companies opting out of their corporate charters and shifting their status to partnerships or S corporations, which allow owners to report business income on their individual tax returns.
Though the Joint Committee on Taxation often releases estimates on the cost of so-called tax expenditures to the Treasury, this is the first effort by the panel that has gone into public circulation to gauge how much revenue could be gained by repealing the provisions.
The analysis demonstrates the choices companies would face if Congress moves forward with plans to overhaul the corporate tax code. Companies including Caterpillar Inc., Procter & Gamble Co. and Coca-Cola Co. have pressed Congress for lower tax rates and would have to decide whether they could support elimination of tax benefits to achieve that goal.
“With half of the potential tax offsets in this analysis marked ‘presently unavailable,’ the elimination of loopholes gets the tax rate down to 28 percent,” said Elaine Kamarck, co-chairwoman of a coalition of companies favoring low rates that includes FedEx Corp. and the Walt Disney Co. She expressed hope that a complete analysis would show that the U.S. would be able to reduce the rate further.
Caroline Harris, the chief tax counsel at the U.S. Chamber of Commerce, said a 28 percent rate is too high, particularly when combined with state taxes. Still, she said, companies should let the tax-writing committees continue to develop proposals and shouldn’t make too much of an analysis that confirms the basic arithmetic they already knew.
“We need to be open-minded here and give people an opportunity,” she said.