By Chris Matthews
Former President Donald Trump is contemplating a further reduction in the corporate tax rate next year, a strategy poised to enhance economic growth, job creation, and worker wages. However, this move could also exacerbate the government’s already substantial budget deficit, according to a recent analysis by the Tax Foundation.
The Proposal and Its Economic Implications
The Tax Foundation’s report, released Wednesday, predicts that lowering the top corporate tax rate to 15% could position the U.S. as one of the most business-friendly nations among affluent countries. Economists Garret Watson and Erica York from the Tax Foundation highlighted that a reduced corporate income tax rate would likely attract more business investments to the U.S., offering economic opportunities for American households and reducing the incentives for businesses to relocate operations or profits overseas.
Financial Consequences
Despite the potential economic benefits, the proposed tax cut would come at a significant financial cost. The Tax Foundation estimates that the ten-year revenue loss could reach up to $673 billion. This substantial loss comes at a time when U.S. debt and deficits are already considered unsustainable, potentially limiting the scope for other pro-growth tax reforms that could be part of the negotiations to extend Trump’s 2017 tax reform law.
Historical Context of Tax Reforms
The 2017 tax legislation, which permanently reduced the top corporate rate from 35% to 21% while temporarily lowering individual tax rates, significantly reduced the tax burden on American businesses, particularly large multinational corporations within the S&P 500. According to John Butters, a senior earnings analyst at FactSet, the median effective tax rate for S&P 500 companies dropped from 31.2% in 2017 to just 20% in 2018.
Trump’s Vision for Future Tax Cuts
In a recent interview with Bloomberg Businessweek, Trump expressed his desire to further lower corporate tax rates despite the current fiscal challenges. He mentioned a potential reduction to 20% during a meeting with the Business Roundtable, a lobbying group of CEOs from America’s largest corporations. Trump also hinted at a preference for an even lower rate of 15%, acknowledging that achieving this would be challenging but beneficial.
Alternative Measures and Economic Projections
The Tax Foundation advocates for alternative measures that could lower the effective tax rate for many corporations more effectively and drive faster economic growth. These include allowing companies to immediately expense investments in capital equipment and research and development. Such measures are predicted to cost $561 billion, generate more substantial growth, and create 106,000 full-time jobs, compared to the proposed corporate tax rate cut’s prediction of 93,000 jobs and a 0.4% increase in long-term GDP and wages.
Debate Among Economists
The efficacy of lower corporate taxes in benefiting workers remains a contentious issue among economists. A study by the Tax Policy Center suggested that the 2017 tax cut had minimal impact on business investment up to 2019, with employment and median wage growth slowing in 2018 and 2019 compared to the years before the law’s enactment.
Conclusion
While Trump’s proposal to further cut corporate tax rates aims to stimulate economic growth and job creation, it also risks significantly increasing the national deficit. The debate over the best approach to tax policy highlights the complexity of balancing economic incentives with fiscal responsibility.
