The Republican tax plan is built around a goal of cutting corporate taxes, but party leaders now wonder if they can afford to make the cuts permanent.
WASHINGTON — The Republican tax plan is built around a goal of cutting corporate taxes, but party leaders now face a key question: Can they afford to make those changes permanent?
Business leaders and conservative economists say a permanent reduction in the corporate tax rate, as opposed to a temporary, 10-year cut, is the best way to spur robust investment and job creation as well as generate the kind of economic growth Republicans say will pay for the tax plan.
But a new analysis from the nonpartisan Tax Policy Center says the corporate tax cuts will cost nearly $7 trillion over the next two decades — $2.6 trillion over the next 10 years and another $4.1 trillion from 2028 through 2037. The hit would be somewhat offset by revenue raised from individual taxpayers over that same period — $470 billion over the next 10 years and an additional $1.4 trillion the next decade. But the entire package is expected to cost an estimated $5.6 trillion over the next 20 years — an amount that economists say would be hard to offset through economic growth alone.
The ability to pay for the tax cuts matters because of Senate rules requiring legislation that adds to the federal deficit after a decade to expire. If Republicans can’t show that a long-term tax cut will be deficit-neutral, they will have to scale back the size of the corporate tax cuts, make them temporary or find another way to pay for them.
The plan now calls for a corporate rate of 20 percent, down from 35 percent; a 25 percent “pass through” tax rate on small businesses; and the elimination of the alternative minimum tax and estate tax, among other business measures. For individuals, it would double the standard deduction; increase the child tax credit; and establish three tax brackets — 12 percent, 25 percent and 35 percent — with the option of adding a fourth, higher tax bracket for the wealthiest Americans. The plan would also do away with some valuable tax breaks, such as the state and local tax deduction.
Trump administration officials and Republican lawmakers hit the airwaves on Sunday to sell their plan, saying economic expansion from the cuts would make it fiscally responsible.
Treasury Secretary Steven Mnuchin, breaking with conventional economic thinking, said on Sunday the tax cuts would actually reduce the deficit because of the economic growth that they would trigger.
“With our plan, we actually pay down the deficit by $1 trillion, and we think that’s very fiscally responsible,” Mr. Mnuchin said on NBC’s “Meet the Press.”
Economists have warned against the effectiveness of temporary tax cuts. A study produced last June by the conservative Tax Foundation found that a short-term cut to the corporate tax rate gives a smaller boost to economic growth that diminishes as its expiration date approaches.
“Economic growth is much weaker under a temporary cut because investment is a forward-looking behavior,” said Alan Cole of the Tax Foundation. “The specter of a future tax increase makes investment under a low rate less enticing, especially for long-lived assets.”
The Joint Committee on Taxation estimated in April that a three-year cut in the corporate tax rate to 20 percent would result in revenue losses of $489.7 billion over 10 years. There would also be additional losses beyond that budget window as companies rushed to bring back money to take advantage of the tax holiday.
Congressional tax-writing committees are set to begin turning the nine-page outline released by the so-called Big Six Republican working group into legislation at the same time the House and the Senate work to come to an agreement on budget resolutions this week. The Senate Budget Committee is expected to agree to a resolution as soon as this week that would allow a $1.5 trillion reduction of federal revenues over the next decade.
Many of the tax plan’s details remain to be worked out, including several big unknowns that could affect its overall cost, including whether lawmakers add a higher rate on top earners. The working group already agreed to allow for a five-year window for full and immediate expensing of business investments, which will cost $192 billion over that period. Limitations on which businesses qualify for the 25 percent “pass through” rate could be another way to claw back some revenue.
They must also come up with “guardrails” to ensure that a new international tax system does not create greater incentives for businesses to keep cash overseas. And the committees still have to address what is referred to as the carried interest loophole, which benefits hedge fund managers, and which President Trump has promised to fix.
However, Republicans will face pressure to scale back their ambition of eliminating the state and local tax deduction, which costs $1.3 trillion over a decade but is prized by many lawmakers, including Republicans in high-tax states like New Jersey, Virginia and New York.
For now, those responsible for selling the tax plan are staying vague about how they will fit the tax cuts into a $1.5 trillion hole. Instead they are largely taking issue with projections that say the cuts would expand the deficit and disproportionately benefit the rich.
“What’s missing from that — and it’s not being hidden, it just doesn’t exist yet — are things like details on the deductions, details on the brackets,” Mick Mulvaney, director of the Office of Management and Budget, said on CNN’s “State of the Union” on Sunday. “It is impossible to sit down and say, this will be the impact on this wage earner or this family at this particular time.”
Many conservatives would like to see tax cuts paid for with spending cuts, including to safety-net programs like Medicaid. That appears to be off the table, for now.
Speaker Paul D. Ryan said on CBS’s “Face the Nation” on Sunday that the failure of Republicans to repeal the Affordable Care Act showed that dismantling entitlement programs is politically toxic.
“I think we’d kill tax reform if we did,” Mr. Ryan said.
As a result, the corporate tax rate cut could be smaller than many conservatives hoped.
“You want to make it permanent because businesses like to make long-term investments,” said Stephen Moore, the Heritage Foundation economist who advised President Trump’s campaign.
