Trump ‘Preference’ for Interest Deduction May Snarl GOP Tax Plan

President Donald Trump is leaning toward preserving a trillion-dollar tax break for corporate borrowers -- a move that economists say could jeopardize his goal of robust economic growth.

The administration’s “preference” is to keep so-called interest deductibility, which allows companies to subtract interest payments from taxable income, Treasury Secretary Steven Mnuchin told The Economist in a joint interview with Trump. Their remarks, published Thursday, reveal a new fissure between Trump’s vision for tax policy and that offered by House Speaker Paul Ryan.

Ryan has called for eliminating interest deductibility, a move that would raise an estimated $1 trillion over 10 years. Gaining that revenue would help pay for rate cuts and other tax measures that Ryan and other GOP leaders want, including a provision that would allow corporations to immediately write off the cost of their capital spending.

Economists say such “immediate expensing” -- as opposed to the current system that allows cost recovery for tax purposes only over time -- would stimulate corporations to invest more. But it’s one or the other; a tax system that allows both interest deductibility and immediate expensing would distort the economic value of debt transactions and spur companies to borrow for tax advantages, not investment, said economist Alan Viard of the American Enterprise Institute.

“Full expensing is what you would need to do to create a meaningful amount of growth,” said Kyle Pomerleau, director of federal tax projects at the conservative-leaning Tax Foundation in Washington. Pomerleau’s research shows that immediate expensing has a greater impact on GDP growth than just cutting the corporate rate. Trump’s tax plan calls for slashing the corporate rate to 15 percent, while the House GOP plan would set it at 20 percent.

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The current corporate tax rate is 35 percent, but many companies pay a far lower effective tax rate by using various exemptions and credits in the tax code. Determining which tax breaks to drop to help pay for rate cuts will occupy much of Congress’s time over the rest this year.

The nascent split over interest deductibility isn’t the first time the White House has taken issue with a key provision in the House GOP tax plan. The border-adjusted tax, which would replace the corporate income tax with a 20 percent levy on companies’ domestic sales and imported goods, has also faced scrutiny from senior administration officials because of concern that it would raise consumer prices on imported goods.

The BAT is estimated to raise more than $1 trillion over a decade. Dropping it and retaining the corporate interest deduction would make it far harder for any tax legislation to avoid adding to the federal deficit. And that’s a problem for Republicans: Under Senate rules, a tax bill that would add to the deficit after 10 years would either need Democratic support or its provisions would have to be temporary.

Still, if the stakes are high, congressional Republicans have sought to downplay any disagreements with the White House on tax specifics.

‘Great Opportunity’

Ryan, who toured a small business in central Ohio Wednesday, said he and his fellow Republicans “completely agree” with the president’s tax principles and are eager to get started on an ambitious tax-code revision.

“Once in every generation, you have an opportunity,’’ he said at the start of a roundtable with business leaders at Accel Inc. “We have got a great opportunity in front of us to get this economy growing.”

Asked about the White House’s support for keeping interest deductibility, a spokeswoman for Republicans on the House Ways and Means Committee touted the benefits of immediate expensing. The panel’s GOP members “have proposed full and immediate expensing for all businesses because it will deliver robust economic growth and create jobs,” said spokeswoman Emily Schillinger, who added that it’s just one component of the proposed tax overhaul.

The committee is scheduled to hold its first hearing on tax legislation next week. It will focus on economic growth.

‘Prime the Pump’

Trump and his economic advisers have said their tax-cut plan will pay for itself by eliminating deductions and loopholes and by helping to create annual economic growth of 3 percent. In the Economist interview, Trump, who has shown little desire for a revenue-neutral tax overhaul, said “it is OK” if the plan increases the deficit in the short term in order to “prime the pump” for growth. He also said he has yet to reach a decision on interest deductibility.

Many economists say projected “supply side” growth of 3 percent is unrealistic, and Pomerleau of the Tax Foundation said the goal is even more remote without the immediate expensing provision from Ryan’s plan. The White House press office didn’t respond to a request for comment Thursday evening.

During the campaign, Trump said companies should have a choice of either continuing to deduct interest expenses or immediately deducting the cost of capital expenses. Proponents of keeping the interest deduction, which include real estate and private equity investors, say it would help to achieve policy makers’ top priority of achieving pro-growth tax reform.

Regardless of Trump’s ultimate decision, the interest deduction’s proponents may have allies in the Senate.

‘Strong Feeling’

“It’s important to a lot of companies,” said Senator John Thune, a South Dakota Republican. “And that issue is going to have to be dealt with. They’ve had different ideas on how to maintain some level of deductibility, because it’s important.”

Senator Orrin Hatch of Utah, the chairman of the tax-writing Finance Committee, also indicated that the interest deduction would survive.

“I have a strong feeling that they’re not going to get rid of interest deduction,” Hatch said. “But you never know.”

Senate Majority Whip John Cornyn said Republicans will have to “come up with a unified plan” on taxes and the fate of the interest deduction is “just one piece of the larger puzzle.” For now, the Senate is focused on crafting health-care legislation, and it’s too early to get into specific details on taxes, he said.

“I think everybody’s sort of in the listening stage,” Cornyn said.

— With assistance by Mark Niquette