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Bigger Picture on the Recent JCT Analysis of Corporate Rates
The Joint Committee on Taxation (JCT) was recently tasked with finding the lowest possible corporate income tax rate that is revenue neutral, given the elimination of all corporate tax expenditures. The JCT finds the rate would only come down to 28 percent, from the current 35 percent. Four things to point out:
2) However, the JCT did estimate the largest of tax expenditures, and none of the remaining 90 seems likely to be very significant. Thus, we can conclude, as others have, that corporate tax expenditures simply don't add up to much. Here is how the Tax Policy Center puts it:
"My Tax Policy Center colleague Eric Toder has been making a similar point for months: It is painfully difficult to find the money to reduce rates very much. Unlike corporate breaks, there are more than enough individual tax preferences out there to pay for individual rate reduction (and have money left over the cut the deficit). The problem is merely a lack of political will. Abolish the mortgage interest deduction anyone? But cutting corporate rates is much tougher. There, JCT finds there are simply not enough dollars in preferences to get the rate below 28 percent."
3) The JCT analysis explicitly ignores the incentives this would create to switch business forms. There are reasons to think this is a significant effect. Most business income is now taxed through the personal income tax code, in the form of S-corporations, partnerships, and sole-proprietorships. So lowering the corporate rate, while closing loopholes available to businesses under either the personal or corporate code, would push many businesses to reform as C-corporations. In this way, the corporate tax base could be expected to grow considerably, such that the revenue neutral rate would be much lower than 28 percent.
4) Lastly, the JCT analysis does not take into account the effect of international capital flows in response to a change in either the corporate rate or tax expenditures. A lower corporate tax burden can be expected to attract more foreign capital and thus increase tax revenues. In fact, recent empirical analysis suggests that lowering the rate alone, without touching tax expenditures, would actually raise revenue, due to the extreme mobility of international capital. In other words, we're on the wrong side of the corporate Laffer curve.
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