Tempered Ambitions on US Tax Reform
At 35 percent, the United States has the highest statutory corporate income tax rate among advanced economies. Reform of the widely criticized corporate tax is among the top agenda items of the Trump administration and the Republican leadership of Congress, and even many Democrats say the time has come to revamp the tax to make US-based multinational corporations more competitive in the global economy. Yet after seven months in power, Trump administration officials are signaling tempered expectations on the possibility for change.
The initial stated goal was to reduce the federal corporate income tax rate to 15 percent from the current 35 percent. A multitude of problems stand in the way of such an overhaul, such as whether the change in the tax code will add to the federal deficit, require the elimination of tax preferences, or require increases in other taxes to replace lost revenues—and, most importantly, whether the tax changes can be negotiated in a bipartisan manner.
In early August 2017, however, White House economic adviser Gary Cohn suggested the corporate tax will be cut in line with the average rate among other advanced economies, which is 23 percent. This tempered ambition is disappointing for businesses but corresponds more closely to the experience of tax cuts in the developed world over the last 30 years.
Since 1986 there have been 94 corporate income tax rate cuts in 39 advanced economies. These cuts share two features. First, few countries have done a large cut at once, and changes take half a dozen years on average to phase in. For example, Ireland took 10 years (1994–2003) and two tax code reforms to go from a 40 percent to a 12.5 percent statutory corporate tax rate, the United Kingdom is reducing its corporate tax rate from 30 to 17 percent over 14 years (2007–20), Israel took 9 years (2003–11) to go from 36 to 24 percent, and France took 5 years (1998–2002) to go from 41.7 to 35.4 percent. Second, the average reduction in a single corporate tax rate change is 8.75 percentage points, although 13 countries have managed a cut of 15 percentage points or more in a single rate change.
Across economies in the Organization for Economic Cooperation and Development (OECD), the average corporate income tax rate in 2016 was 23 percent, down from 48 percent in 1986. The United States would have to raise $160 billion a year in fiscal revenue to effect such a statutory corporate income tax rate in a fiscally neutral manner. Such fiscal neutrality can be achieved by coupling the reduction in the general tax rate with closed preferences elsewhere in the tax code or by instituting or raising other taxes, as demonstrated in several OECD countries.
Should the Trump administration manage to get such a corporate tax cut through the Congress, the United States will still trail destinations such as Cyprus, Ireland, Luxembourg, and the Netherlands in attractiveness to US multinational companies that keep profits abroad to avoid taxes. But it would be a step in the right direction.