A Tax Cut for Business and Not for People
The rate cuts, deduction removals and other changes to the individual income tax code envisioned in the Tax Cuts and Jobs Act that the House Ways and Means Committee begins considering this week add up to a reduction in taxes of $516.7 billion over the next five years and $848 billion over the next 10 years, according to Congress's Joint Committee on Taxation.
The rate cuts, deduction removals and other changes to the corporate income tax code, meanwhile, add up to $559.9 billion over the next five years and $846.5 billion over the next 10 years. So it's about a 50-50 split between people and corporations. That sounds fair, right?
Not exactly. Individuals currently generate five times more tax revenue in the U.S. than corporations do. 1 Their estimated tax cut of $516.7 billion over the next five years amounts to 5 percent of estimated individual income tax revenue over that period, 2 while corporations' $559.9 billion tax cut amounts to 29 percent of estimated corporate tax revenue. That's right: It's a 5 percent tax cut for people and a 29 percent tax cut for corporations.
There are elements of the tax bill that complicate this picture a bit. About half the individual tax cut total -- $201.9 billion over five years and $448 billion over 10 -- comes from reducing the top tax rate for owners of pass-through entities such as S corporations, sole proprietorships and partnerships (which includes limited liability companies) to 25 percent. So that's effectively another business tax cut, and means the remaining individual income tax cut for those of us who don't happen to own a limited liability company or two (or 500) will be something more like 3 percent. On the other hand, the bill's envisioned changes in the "taxation of foreign income and foreign persons" are expected to bring in an additional $173.7 billion over five years and $277.8 billion over 10, much of which will come from businesses and business owners. Still, the basic disparity remains and is possibly increased: Businesses will be getting a much, much bigger tax cut in percentage terms than people.
But hey, so what?! Corporations are people, my friend. That is, businesses are owned by and employ individuals. They also drive economic growth, and can often shift activities to other countries to avoid high taxes. There is now a substantial economic literature on who actually pays the corporate income tax, and widespread agreement that workers -- who generally find it difficult to shift their activities to other countries to avoid high taxes -- end up paying a significant share of it (there's much less agreement on what exactly that share is). So sometimes cutting taxes on business makes a lot of sense. With U.S. statutory corporate income tax rates currently among the highest in the world, this would appear to be one of those times.
Still, it's not a popular thing to do. When Gallup last checked in April, 67 percent of Americans thought corporations paid too little in taxes. Only 9 percent thought they paid too much. These percentages haven't changed much over the years. If you're going to cut taxes on corporations and corporation-like pass-through entities, you have a selling job to do.
Part of that selling involves educating people about who really pays the corporate income tax, which proponents of the tax plan certainly have tried to do, although they've been going about it with so little nuance and such seeming exaggeration that I don't know if they've really convinced anybody. Come on, raise your hands -- how many of you think you will really get a $4,000 to $9,000 pay raise thanks to corporate tax cuts, as the White House Council of Economic Advisers projected last month? One can still make an argument for the cut without such claims: Harvard tax expert Mihir Desai, who had criticized the CEA estimates as exaggerated, did just that here at Bloomberg View on Monday. But the White House and House Republicans seem to be pitching their arguments mainly to the already converted.
It also helps with the sales job if people feel like they're getting a fair deal from the changes in the tax code that directly affect them. This would be much easier to achieve if individual income taxes were being cut by 10 percent or 20 percent instead of just 4 percent or 5 percent, but this would result in far too big a revenue loss to contemplate. Another possibility would be to arrange things so that the largest possible number of taxpayers benefited from the legislative changes, but House Republicans haven't exactly chosen to do that, either. That is, their bill does deliver tax cuts to all income groups in the first few years after its passage, but from 2024 onward the JCT projects that individuals would -- if you exclude the pass-through tax cut, the benefits of which flow mainly to people in the top income percentile -- pay more in income taxes than under current law. 3 This strange result is due to provisions that are set to expire after a few years to reduce the bill's projected cost but that Ways and Means Republicans say future Congresses won't actually allow to expire. Trust what we tell you is going to happen in five years, the message is, not what's in the legislation.
There is some reason to suspect that they're right. Because the expiring provisions benefit middle- and low-income taxpayers, Democrats may decide to join in preserving them as they ended up doing with similarly temporary tax cuts enacted in 2001 and 2003. But it's a terrible look: Businesses get permanent tax cuts while people only get temporary ones.
And that sort of sums up the legislation. Its core provision may well be a good idea. But it's a tough sell, and its proponents are doing a terrible job of selling it. They may still get a version through Congress, where donor opinions often matter more than voter opinions, but the bill is already deeply unpopular and likely to get more so. It could turn out to be a political disaster whether it passes or not.
This hasn't always been the case. In the 1920s and 1930s corporate income taxes generated more revenue than individual income taxes. In the 1960s the ratio was 2-to-1 individual to corporate.
I'm using the 2018-2022 revenue projections from the White House Office of Management and Budget.
This also excludes the scaling back of the estate tax envisioned in the bill -- which, like the pass-through tax cut, showers most of its direct benefits on the very wealthy. With them included there's still an overall reduction in individual taxes, but by 2027, according to the JCT's analysis, 65 percent of that reduction will be flowing to those making $1 million or more a year.
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Brooke Sample at email@example.com