We will never achieve a good tax reform by trusting bad revenue estimates.
According to Wall Street Journal reporter Richard Rubin, “Each percentage-point reduction in the 35% corporate tax rate cuts federal revenue by about $100 billion over a decade, and independent analyses show economic growth can’t cover all the costs of rate cuts.”
Economic growth does not have to “cover all the cost” to make that $100 billion-per-point rule of thumb almost all wrong. If extra growth covered only 70% the cost of a lower rate, the static estimates would be 70% wrong. Yet the other 30% would be wrong too, because it ignores reduced tax avoidance. Mr. Rubin’s bookkeepers’’ rule-of-thumb implicitly assumes zero “elasticity” of reported taxable profits. Corporations supposedly make no more effort to avoid a 35% tax than to avoid a 25% tax.
Acceptance of this simplistic thumb rule – which imagines a 35% corporate rate could raise $1 trillion more over a decade than a 25% rate – explains why Ways and Means Committee Chairman Kevin Brady still insists a big new import tax is needed to “pay for” a lower corporate tax rate.
In this view, a border adjustment tax (BAT) is depicted as a tax increase for some companies to offset a tax cut for others. No wonder the idea has been ruinously divisive – with major exporters lobbying hard for a BAT and major retailers, refiners and automakers vehemently opposed. Mr. Rubin declares the BAT “dead or on political life support,” while nevertheless accepting that it would and should raise an extra $1 trillion over a decade – assuming no harm to the economy and no effect on trade deficits.
Like Mr. Rubin, Reuters claims “Trump could have trouble getting the rate much below 30 percent without border adjustability.” That is false even on its own terms because the Ryan-Brady plan would eliminate deductibility of interest expense, which is enough to “pay for” cutting the rate to 25% on a static basis. Adding a BAT appears to cut the rate further to 20%, but the effective Ryan-Brady rate is really closer to 25% because the import tax and lost interest deduction are not a free lunch.
In any case, the entire premise is wrong. There is no need to “pay for” cutting a 35% corporate “much below 30 percent” because nearly every major country has already done that and ended up with far more corporate tax revenue than the U.S. collects with its 35% tax.
The average OECD corporate tax rate has been near 25% since 2008, and revenue from that tax averaged 2.9% of GDP. The U.S. federal tax rate is 35% and revenue averaged just 1.9% of GDP. Ireland’s 12.5% corporate rate, by contrast, brought in 2.4% of GDP from 2008 to 2015.
Sweden cut the corporate tax rate from 28% to 22% since 2013 and corporate tax revenues rose from 2.6% of GDP in 2012 to 3% in 2015 according to the OECD. Britain’s new 20% corporate tax in 2015 brought in 2.5% of GDP according the same source, unchanged from 2013 when the rate was 23%.