One of the biggest challenges to enacting comprehensive taxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. reform is overcoming the misunderstandings about how various components of the plan work and how they impact taxpayers and the broader economy.
For example, there have been a lot of conflicting reports recently about the business provisions in the House GOP tax reform “Blueprint,” especially the effect of the border adjustment on importers in each state.
In analyzing the effects of a major tax reform plan such as the Blueprint, care must be taken to measure its economic impact comprehensively, not on a piecemeal basis. The Tax Foundation does this by using our Taxes and Growth (TAG) Macroeconomic Tax Model. The TAG model takes into account all aspects of a tax plan to produce estimates of the effects of the plan on GDP, investment, wages, jobs, and federal tax revenues.
When Tax Foundation economists used the TAG model to score the Blueprint in July 2016, they estimated that the plan would result in a gross tax cut of $4.7 trillion for U.S. businesses over a decade, as measured on a static basis. As is shown in Table 1 below, the largest of these tax cuts are the full expensingFull expensing allows businesses to immediately deduct the full cost of certain investments in new or improved technology, equipment, or buildings. It alleviates a bias in the tax code and incentivizes companies to invest more, which, in the long run, raises worker productivity, boosts wages, and creates more jobs. provision and cutting the corporate rate to 20 percent. These provisions would reduce federal business revenues by $2.2 trillion and $1.8 trillion over a decade respectively. The tax rate cut for pass-through firms lowers revenues by $515 billion over a decade.
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Source: https://taxfoundation.org/details-and-analysis-2016-house-republican-tax-reform-plan/ |
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|
Provision |
Static Revenue Effect (in Billions) |
|---|---|
|
Revenue Loss Provisions |
|
|
Allow full expensing of capital investments |
-$2,236 |
|
Lower the corporate income tax rate to 20% |
-$1,807 |
|
Tax pass-through business income at a maximum of 25% |
-$515 |
|
Move to a territorial tax system |
-$160 |
|
Total business tax cuts = |
-$4,718 |
|
Base broadening provisions and offsets |
|
|
Disallow interest deduction on new loans |
+$1,194 |
|
Border adjustment |
+$1,069 |
|
Eliminate section 199 and all business credits, limit net operating loss deduction |
+$701 |
|
Enact deemed repatriation |
+$185 |
|
Total base broadeners and offsets = |
+$3,149 |
|
Net Tax Cut for U.S. Businesses= |
-$1,569 |
The Blueprint also contains some significant base broadeners and offsets that are intended to reduce the overall revenue loss from the business tax cuts. The most important base-broadening provisions in the Blueprint are the border adjustment and the disallowance of the deduction for net interest expenses, which raise $1.1 trillion and $1.2 trillion over a decade respectively.
The plan also raises another $900 billion by eliminating most of the other corporate tax deductionA tax deduction is a provision that reduces taxable income. A standard deduction is a single deduction at a fixed amount. Itemized deductions are popular among higher-income taxpayers who often have significant deductible expenses, such as state and local taxes paid, mortgage interest, and charitable contributions. s and by imposing a one-time tax on the profits of U.S. multinationals currently booked overseas.
Together, the offsets reduce the static revenue loss of the business provisions to roughly $1.6 trillion, still a significant net tax cut for all U.S. businesses. The TAG model also finds that once the macroeconomic effects of the business-side of the Blueprint are taken into account, the corporate half of the Blueprint is actually revenue neutral.
From a macroeconomic standpoint, the business tax provisions in the Blueprint are the most important ingredients to the growth it generates. According to the TAG model, even accounting for the border adjustment, the Blueprint would boost the long-term level of GDP by 9.1 percent, investment by 28 percent, after-tax incomes by an average of 8.7 percent, and create 1.7 million new jobs. (See here for the state-by-state impact of the new jobs and higher after-tax incomeAfter-tax income is the net amount of income available to invest, save, or consume after federal, state, and withholding taxes have been applied—your disposable income. Companies and, to a lesser extent, individuals, make economic decisions in light of how they can best maximize their earnings. s for median households.)
As lawmakers consider how to proceed in their effort to overhaul our tax code, they should be wary of any “facts” or figures that show only the pain of tax reform and none of the gain. This is especially true of many of the recent reports about the effects of the border adjustment. These reports tend to make three common mistakes:
- They analyze only the import side of the border adjustment and fail to account for the fact that exports are exempt from the 20 percent tax. The proper way to analyze the true impact of the border adjustment is to net the benefit of the export exemption against the cost of the import tax. For most states, this adjustment would dramatically reduce the overall impact of the border adjustment.
- They fail to account for the benefit of the tax rate cuts for domestic producers and sellers. The Blueprint cuts the corporate tax rate from 35 percent to 20 percent and the tax rate on pass-through businesses from 39.6 percent to 25 percent. The vast majority of U.S. businesses are neither importers nor exporters so they would enjoy a substantial reduction in their tax burdens. This tax cut for domestic firms must be accounted for in any comprehensive analysis of the Blueprint.
- They frequently give the impression that the border adjustment component in the Blueprint’s proposed destination-based cash-flow tax (DBCFT) system is in addition to the traditional corporate tax system. The reality is that the DBCFT system replaces our current corporate income taxA corporate income tax (CIT) is levied by federal and state governments on business profits. Many companies are not subject to the CIT because they are taxed as pass-through businesses, with income reportable under the individual income tax. , so there is no added tax burden.
Taking all of these factors into account, we can estimate how much tax relief that businesses in every state would enjoy as the result of the Blueprint over the next decade.
| Net Business Tax Relief (in Billions) | ||||
|---|---|---|---|---|
| *Total may not add to $1.569 trillion because territories and other are not included Source: https://www.irs.gov/pub/irs-soi/14databk.pdf, p. 12 |
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| United States | -$1,569 | |||
| Alabama | -$7 | |||
| Alaska | -$1 | |||
| Arizona | -$19 | |||
| Arkansas | -$34 | |||
| California | -$205 | |||
| Colorado | -$33 | |||
| Connecticut | -$38 | |||
| Delaware | -$19 | |||
| District of Columbia | -$6 | |||
| Florida | -$40 | |||
| Georgia | -$48 | |||
| Hawaii | -$2 | |||
| Idaho | -$1 | |||
| Illinois | -$89 | |||
| Indiana | -$20 | |||
| Iowa | -$7 | |||
| Kansas | -$10 | |||
| Kentucky | -$10 | |||
| Louisiana | -$7 | |||
| Maine | -$1 | |||
| Maryland | -$14 | |||
| Massachusetts | -$41 | |||
| Michigan | -$22 | |||
| Minnesota | -$86 | |||
| Mississippi | -$3 | |||
| Missouri | -$44 | |||
| Montana | -$1 | |||
| Nebraska | -$32 | |||
| Nevada | -$3 | |||
| New Hampshire | -$1 | |||
| New Jersey | -$97 | |||
| New Mexico | -$1 | |||
| New York | -$127 | |||
| North Carolina | -$39 | |||
| North Dakota | -$2 | |||
| Ohio | -$55 | |||
| Oklahoma | -$18 | |||
| Oregon | -$9 | |||
| Pennsylvania | -$56 | |||
| Rhode Island | -$16 | |||
| South Carolina | -$7 | |||
| South Dakota | -$2 | |||
| Tennessee | -$26 | |||
| Texas | -$145 | |||
| Utah | -$7 | |||
| Vermont | -$2 | |||
| Virginia | -$51 | |||
| Washington | -$25 | |||
| West Virginia | -$2 | |||
| Wisconsin | -$27 | |||
| Wyoming | -$1 | |||