Can the 'Big Six' Keep Tax Reform From Being Deep-Sixed?

Congress should take a scalpel to the corporate tax rate.

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3D concept for scissors cutting the word TAXES
Raducomes/Dreamstime

This week, the so-called "Big Six" Republican tax leaders unveiled more of their plan to reform the tax code. As usual, it'll be light on details, but we're told to expect a cut in the corporate income tax rate to 20 percent—as opposed to the 15 percent rate President Donald Trump has promised.

That's unfortunate. With Republicans being the worst negotiators, this rate will only go up once Democrats and the Republicans who behave like Democrats have their say. Even though the United States has the highest corporate tax rate of all developed countries, some lawmakers still believe it's unfair or politically impractical to give corporations tax cuts.

Never mind that a high rate and a worldwide tax system have resulted in massive and legitimate tax avoidance behaviors—such as storing overseas income abroad and transfer pricing—making the return on the corporate tax mediocre. Uncle Sam raises relatively little revenue as a share of gross domestic product from corporations, and less capital is invested at home because trillions of dollars stay abroad.

Also, remember that firms don't pay taxes anyway. Individuals do. In this case, the burden of corporate taxation falls on workers through lower wages. That's why economists agree that the poorly designed tax is an inefficient way to raise revenue, is economically destructive and should be repealed entirely. In other words, even 15 percent would be too high, and higher is idiotic.

Now, a country that's $20 trillion in debt, heading toward trillion-dollar deficits and governed by lawmakers who can't find a spending program they can live without shouldn't cut taxes without serious offsets. So let's do that.

According to the Tax Foundation, lowering the corporate tax rate from its current 35 percent to 20 percent would reduce revenue—even accounting for positive economic effects—by about $718 billion over 10 years. Lowering it to 15 percent would cost $995 billion. Assuming leadership already has a plan to offset a reduction in the corporate tax rate to 20 percent, we only need an extra $277 billion in revenue over 10 years to cover the additional rate cut.

Finding $27.7 billion a year in spending cuts is easy. A combination of cuts to the annual $56 billion spent on corporate welfare (which benefits large and wealthy firms), eliminating most of the $50 billion in improper overpayments from health care programs to individuals and instituting a cap on federal spending on Medicaid would more than get us there. And there are so many more spending cuts available for willing lawmakers.

Republicans could also lower the rate to 15 percent by getting rid of the many special interest loopholes that make our tax code unfair and burdensome. Incidentally, that's exactly what the president promised to do.

Tax expenditures would be the place to start. You want to get rid of the ones benefiting activities that equate to spending through the tax code. The Heritage Foundation's David Burton calculated that, excluding the provisions meant to mitigate any inefficient double taxation of income and deductions for business costs, genuine business tax expenditures could raise $386 billion over 10 years. The top deduction alone—for domestic production activities—would raise $193 billion.

The real cash, however, is on the individual side, starting with refundable tax credits, such as the child tax credit. Because the child tax credit is paired with actual spending (not just a loss in tax revenue), the Tax Foundation estimates that getting rid of it would save $710 billion. Before you cry "but the children," I'll remind you that social policy priorities aimed at caring for children—or health or education, for that matter—are not best achieved through these tax preferences.

If the Big Six aren't already considering terminating the state and local tax deductions that provide a tax advantage to high-income earners in high-tax states, which would save $1.71 trillion over 10 years, they should. The mortgage interest deduction—which encourages real estate debt, to the great delight of real estate agents and lenders—could be eliminated, for a savings of $1.61 trillion, or capped for debt above 500K, for a savings of $308 billion. Also ripe for termination is the charitable contributions deduction, which would bring in $665 billion over 10 years.

There are plenty of options for lawmakers to start the negotiation process for a much lower corporate tax rate than 20 percent. In fact, with a sharp scalpel and political courage, you could throw in some good tax reforms on the individual side, too.

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  1. Spoiler alert: The Big Six refers to the folds on Chris Christie’s torso.

    1. I’m making over $7k a month working part time. I kept hearing other people tell me how much money they can make online so I decided to look into it. Well, it was all true and has totally changed my life.

      This is what I do… http://www.netcash10.com

  2. Holy shit, Hugh Hefner is dead. I guess he wasn’t immortal after all. RIP, Hugh.

    1. When he was young, he was the envy of most men. When he got to middle aged, it was kinda weird. He long ago passed into creepy.

      1. i am sure if you were him, you would think it was creepy to bang 21 year old playmates.

        1. If I was a 21-year-old playmate, I would find it creepy.

        2. I’m over 60 and I’d find it creepy. And, in my work, I talk to 20 to 30 year old, good looking women on a regular basis. Even such a thought would be creepy. On so many levels.

          Until you get to the age of an elder statesman, you probably won’t understand.

  3. Also, remember that firms don’t pay taxes anyway. Individuals do.

    This is what bugs me the most about business taxes. They pass it on to customers like every other expense. It’s just smoke and mirrors to keep the easily deluded on the boil.

    1. Yup, every tax on business skews the free market.

      A tax on business wages will encourage a business to hire less people. A tax on profit will encourage a business to keep profits in low tax countries. A tax on business assets will encourage a business to have less assets. Forcing business to collect taxes from customers are costs passed onto consumers. Forcing business to hire hundreds of tax professionals to navigate the complex tax code are costs passed onto customers.

      A low flat tax on business to cover the cost of roads and other government services they use seems responsible and that should be enough for our wasteful government.

      1. On the flipside, if you didn’t tax businesses and only taxed individuals, you’d see a lot more “benefits” like company cars, company charge cards, and so-on, as dollar-for-dollar it would give more bang-per-buck then just increasing salary. So it’s not like there’s no “skew” in that way either.

        So in the end, it’s not really a question of “how do we unskew things”. it’s “what level of skew is acceptable”.

        1. I don’t think that’s correct. You could require reporting of those benefits (some benefits are already reported such as tuition assistance or reimbursement), but things like a company car are an expense that a business can deduct today just like they deduct salaries, so from a business perspective, they don’t care between paying someone $x and giving them a $x benefit: unless the employee has a preferance.

          1. Simple fix from a tax accountant. And, one that simplifies the tax code too.

            Any item of value that is used by or passes from, the organization to an individual who is a part of that organization is a taxable transaction to the individual. No ifs ands or buts.

            Near nirvana: A national sales tax to replace income taxes. It’s not perfect. But, much easier to calculate, live with, monitor and enforce. It equally burdens all transactions so the market distortions are neutral between items of commerce.

            The only way around it is black market activity and that’s an issue with any tax scheme.

  4. Also ripe for termination is the charitable contributions deduction, which would bring in $665 billion over 10 years.

    Interesting.

    1. What is interesting is the cut in IRS personnel who monitor the charitable corporations. The elimination of that deduction comes with a free cut in federal spending.
      If a charity cannot get donations without a tax deduction, it probably is not doing a good job.

      1. Charities do a lot of things more efficiently than the government.

        Cut the deduction and watch contributions decrease.

        Then watch government spending increase to cover the shortfall. Activities that used to be administered by small organizations staffed with large numbers of volunteers and poorly paid staff will be replaced with government agencies.

        Good job.

        1. still not hearing any reason why charities should be subsidized.

          1. Because charitable deductions are huge, they are used to reduce total taxable income especially by the very wealthy, so they will go down if the deduction is cut, and it already constitutes the largest transfer of wealth from rich to poor of all in the US . And it is all voluntary, so what’s not to like as a libertarian?

            1. And about charities being subsidized? What? You mean that other tax payers subsidize charities by paying more in taxes? This is the very tired old argument that it is somehow morally reprehensible when someone gets to keep more of their money than someone else.

      2. Non-profits seldom are. They just chew up all of their income in salaries and benefits for the paid staff so as to retain their tax exempt status.

        This is coming from someone closely involved in auditing of non-profit entities.

  5. Starve…the…beast.

    1. Takes too long. Just kill the damn thing!

  6. Corporations don’t pay taxes at all!

    Yes, some 2/3s of US corps. don’t owe any taxes in any given year, since they aren’t profitable enough to have positive tax rate. But that’s an aside.

    The elasticity of corporate taxes means that by and large, individuals pay the taxes be they shareholders, employees, or consumers.

    The CBO produced a report “THE INCIDENCE OF THE CORPORATE INCOME TAX” in which it states

    “A corporation may write its check to the Internal Revenue Service for payment of the corporate income tax, but that money must come from somewhere: from reduced returns to investors in the company, lower wages to its workers, or higher prices that consumers pay for the products the company produces….The short-term burden of the corporate tax probably falls on stockholders or investors in general… In the very long term, the burden is likely to be shifted in part to labor, if the corporate tax dampens capital accumulation.”

    1. As noted elsewhere, it also distorts corporate behavior from what it would be absent the taxes.

      1. Right you are, Ladyhawk! When we’ve rid ourselves of the charitable deduction, then we can have an honest discussion about actual charitable giving, without the lure of a tax write off in the equation.

        It will actually be an honesty inducing process, where everyone decides just what they want to support. Charities will then be in the business of competing — honestly — for our sympathies and donations to various causes, without the old cliche inducing, “it’s a write off.” Furthermore, as you imply, those who don’t give won’t be paying someone else’s share of the tax burden. Right?

  7. About 1/3 of the profitable companies can manipulate their taxes to avoid paying any or nearly nothing (i.e., very low effective rates).

    But all corporations have a high compliance cost associated with not paying those corporate taxes.

    The corporate income tax is the least efficient way to collect those revenues, costing companies (the economy) about $500B in compliance costs on top of the $500B or so in taxes actually collected.

    If we just cut to corporate rate to 0% and called it a $500B (annual) Economic Stimulus Package, we’d get have $1T or so pumped back into the productive economy. We’d have $4T or so in overseas cash repatriated.

    Most of that money will flow down into individual pockets as profits/dividends for shareholders or increased wages. Those all get taxed on 1040, so net “loss” to government is probably not anywhere near $500B the tax cut “cost”.

    1. “About 1/3 of the profitable companies can manipulate their taxes to avoid paying any or nearly nothing (i.e., very low effective rates).”

      Uh, huh. I’ve got a corporate tax position for you and am willing to pay you 10% of any income tax savings you generate for us. That could be in the millions each year.

      As I often so often told my clients: You can’t get out of paying income taxes unless you are willing to lie, cheat and steal. Good tax planning at best can only defer the payment of income taxes. At best, until your death.

      Interesting aside: I’ve never seen a large entity actually cheat on it’s income taxes. The majority of mom and pop enterprises I have dealt with do so on a regular basis. But, everyone will tell you they’d be happy to pay their taxes if only those big corporations were paying theirs.

  8. “Assuming leadership already has a plan to offset a reduction in the corporate tax rate to 20 percent”

    lol

    1. i laughed too

    2. Shitting rainbows from her Unicorn ass

  9. Congress should take a scalpel to the corporate tax rate.

    If by “scalpel”, you mean “woodchipper”, then yes.

  10. “Big Six” was my nickname in college.

    1. Where is John Holmes when we did him?

  11. “Assuming leadership already has a plan to offset a reduction in the corporate tax rate to 20 percent […]”
    Citation needed.

  12. “Assuming leadership already has a plan to offset a reduction in the corporate tax rate to 20 percent, we only need an extra $277 billion in revenue over 10 years to cover the additional rate cut.”

    “Assuming leadership already has a plan to offset a reduction in the corporate tax rate to 20 percent”? Ha, ha, ha, ha, ha, ha, ha, ha, ha, ha, ha, ha, ha, ha, ha, ha, ha, ha, ha, ha, ha, ha, ha, ha, ha, ha, ha, ha, ha, ha, ha, ha, ha, ha, ha, ha, ha, ha, ha, ha, ha, ha, ha, ha, ha, ha, ha, ha, ha, ha, ha, ha, ha, ha, ha, ha, ha, ha, ha, ha, ha, ha, ha, ha, ha, ha, ha, ha, ha, ha, ha, ha, ha, ha, ha, ha, ha, ha, ha, ha, ha, ha, ha, ha, ha, ha, ha, ha, ha, ha, ha, ha, ha, ha, ha, ha, ha, ha, ha, ha, ha, ha, ha, ha, ha, ha, ha, ha, ha, ha, ha, ha, ha, ha, ha, ha, ha, ha, ha, ha, ha, ha, ha, ha, ha, ha, ha, ha, ha, ha, ha, ha, ha, ha, ha, ha, ha, ha, ha, ha, ha, ha, ha, ha, ha, ha, ha, ha, ha, ha, ha, ha, ha, ha, ha, ha, ha, ha, ha, ha, ha, ha, ha, ha, ha, ha, ha, ha, ha, ha, ha, ha, ha, ha, ha, ha, ha, ha, ha, ha, ha, ha, ha, ha, ha, ha, ha, ha, ha, ha, ha, ha, ha, ha, ha, ha, ha, ha, ha, ha, ha, ha, ha, ha, ha, ha, ha, ha, ha, ha, ha, ha, ha, ha, ha, ha, ha, ha, ha, ha, ha, ha, ha, ha, ha, ha, ha, ha, ha, ha, ha, ha, ha, ha, ha, ha, ha, ha, ha, ha, ha, ha, ha, ha, ha, ha, ha, ha, ha, ha, ha, ha, ha, ha, ha, ha.

    Dr. de Rugy, you are one funny Ph.D.

    1. That was definitely the punchline for me too. She had me until then, I couldn’t take anything else seriously through my giggles. She actually thinks the GOP will cut something. She must not know what they say happens when you assume

  13. You would think, with many congressmen having been lawyers and all, that they would understand the art of the deal.
    Start with freaking 0% proposed corporate taxes (the Dems will attack you anyway at 20% for favoring the rich) and negotiate up to 15% or 20%, saying you “decided to listen to the opposition,” were “acting in a bi-partisan fashion,” “ameliorated the potential deficit,” and “traded a higher rate for some spending cuts.”

    1. Except their #1 goal is pandering to their base. And most Americans, even most Republicans, would choke at a 0% corporate tax rate regardless of what the economists tell them. So going for 0% out of the gate? More trouble then it’s worth, regardless of what their end-goal actually is.

      1. That’s because everyone knows that all of our federal deficit issues would be solved and, we’d achieve nirvana, if we just made all those ginormous, multinational corporations pay more income taxes.

        And the birds would all fly upside down over D.C.

  14. Finding $27.7 billion a year in spending cuts is easy.

    Not after the $700 billion boondoggle including $80 instead of the $56 that Drumpf asked for.

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