The Republican Party is gearing up to detail the intricacies of its tax reform overhaul this week and the corporate tax rate is a main area of uncertainty for lawmakers, but one that could make a big difference in future economic growth.
While Trump has suggested dropping the current corporate tax rate by 20 percentage points, to 15% from the current 35%, GOP lawmakers, including Sen. Orrin Hatch (R-Utah), have said the 20% to 25% range is more likely – a discrepancy that could lead to an enormous difference in U.S. economic growth moving forward.
“There would be a big advantage in dropping the corporate tax rate to 15% instead of 20%,” Chris Edwards, director of tax policy studies at Cato and editor of www.DownsizingGovernment.org, told FOX Business. “The lower rate would make more U.S. investment projects viable from a net return perspective, would increase cash-flow to companies available for investment, and would make the U.S. a better location for investments than competitive low-tax countries such as Britain. As companies invested more at home, U.S. output, wages, and incomes would rise.”
Brian Riedl, Manhattan Institute senior fellow and former chief economist to Sen. Rob Portman (R-OH), agrees, telling FOX Business “a 15% rate could fall below our trading partners and turn America into a global magnet for investment.”
Substantially lowering the corporate tax rate is also a key part of achieving Trump’s 3% GDP growth target.
“It is plausible to raise annual economic growth from 2% closer to 2.5% with pro-growth reforms,” Riedl said. “That doesn’t seem like a major difference, but 2.5% growth would mean the economy doubles in size 8 years sooner than under 2.0% growth.”
However, Riedl said ultimately the corporate rate will depend on the GOP’s price objective for the total tax reform package.
“Current indications of $1.5 trillion for all reforms suggest a corporate tax rate of likely around 20% and perhaps 25% for pass-throughs,” he said. “The president and conservative lawmakers want 15%, which will be challenging to pay for. Yet 25% would still be too high relative to our trading partners. So 20% may be where they end up.”
Edwards also believes the proposed rate to land at 20%, though he urged House Republicans to be bolder and adopt the 15% rate, especially considering Canada – a key U.S. trading partner—has a rate of 15%.
A 20 percentage point cut to the current 35% corporate tax rate has been the president’s preference since April, however some lawmakers have argued it is impossible to slash the business rate that significantly without adding to the deficit. The House GOP’s blueprint, approved by House Speaker Paul Ryan (R-Wis.), proposed a 20% corporate tax rate.
House Republicans will hold a “tax retreat” next week, though details have not yet been disclosed. It is unclear exactly when this week the GOP will reveal fuller details of the tax reform bill.