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- Baucus Offers Ways to Pay for a Lower Corporate Tax Rate
Baucus Offers Ways to Pay for a Lower Corporate Tax Rate
Senator Max Baucus (D-MT), Chairman of the Senate Finance Committee, recently released three detailed discussion drafts covering international corporate tax reform, administration, and cost recovery. These are very complicated proposals, and we’ll have more to say about them in the days and weeks ahead, but here are some important big picture items to keep in mind.
First, these are very complicated proposals. International tax and cost recovery are two of the most complicated areas of the corporate tax code, and Senator Baucus has apparently made an effort to simplify matters. Nonetheless, it takes the Joint Committee on Taxation (JCT) 85 pages to describe Senator Baucus’s international proposal and 70 pages to describe his cost recovery proposal.
Second, the main idea of these proposals, at least on international and cost recovery, is to raise money to “pay for” a lower corporate tax rate. JCT has not officially scored these proposals yet but expect at least $1 trillion in new revenue over 10 years. That’s what it would take to lower the corporate tax rate to 25 percent and move to an international corporate tax system more akin to our trading partners. We believe the entire effort to “pay for” a lower corporate tax rate is misguided, as it’s premised on Congress’s static scoring rules, which assume away any effect of taxes on economic growth, investment, labor supply, etc. Economists have long understood that the corporate tax is particularly damaging to economic growth. Our Taxes and Growth Model takes this into account and shows that cutting the corporate tax rate would boost GDP, investment, and wages to such an extent that it would also boost total federal tax revenue.
Third, in practice, the major effect of the international proposal would be to shift the corporate tax burden to U.S. businesses operating abroad (i.e., multinational corporations). However, the major problem with our current international tax system is that it’s uncompetitive, causing many multinationals to leave the U.S. to escape the developed world’s most punitive corporate tax. The plan outlined in the discussion drafts will make matters worse, mainly by eliminating deferral without fully moving to an exemption system.
Fourth, the major effect of the cost recovery proposal would be to shift the corporate tax burden to U.S. manufacturers and other capital-intensive companies. Meanwhile, the major problems with the U.S. economy are sluggish investment and capital formation. This proposal will make matters worse by reducing capital cost recovery, which will push more manufacturing abroad, hurting blue-collar workers and shrinking investment and GDP.
Currently, business taxes are too high and complicated, which suppresses business investment, worker productivity, wages, and GDP. Overall, the proposals from Senator Baucus’s discussion drafts fall short in addressing the big problems with the U.S. tax code.
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