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White House Cracks Door on 22 Percent Corporate Rate

Posted on December 5, 2017 by Jonathan Curry

The White House wobbled on its 20 percent corporate income tax rate red line over the weekend, in a move that sparked concern from lobbyists but elicited a shrug from some policy wonks.

“Now we go onto conference and something beautiful is going to come out of that mixer,” President Trump told reporters, hours after the Senate passed its version of the Tax Cuts and Jobs Act early December 2. Trump at first lauded the Senate for bringing the corporate rate from 35 percent down to 20 percent — a feature of both the House and Senate versions of the bill — but then added that it could still be 22 percent.

For weeks, Trump administration officials have stressed that, while they planned to allow the regular order process in Congress to run its course, they had a few nonnegotiable demands. Notably, a 20 percent corporate tax rate was among those priorities.

Office of Management and Budget Director Mick Mulvaney said Trump’s comments reflect the White House recognition that this bill is “very close to the finish line.” Speaking December 3 on CBS’s Face the Nation, Mulvaney explained that if “something small happens in conference that gets us across the finish line, we'll look at it on a case-by-case basis.”

But Mulvaney added that he didn’t think there would be “any significant change in our position on the corporate taxes.”

The push to limit the corporate rate reduction to 22 percent came most prominently from Sens. Marco Rubio, R-Fla., and Mike Lee, R-Utah, who proposed using the additional revenue to expand the child tax credit. The White House responded that it would not support limiting the corporate rate cut for that purpose.

The 20-percent rate was also the focal point of a December 4 open letter to lawmakers in which four conservative organizations urged the pending conference committee to keep priority reforms, including the “highly competitive corporate tax [rate of] 20 percent or lower.”

Michael Bars, a spokesman for Freedom Partners, one of the signatories on the letter, told Tax Analysts that his group believed “deviating from the 20 percent rate stipulated under the unified framework would undermine the positive benefits of tax reform promised to taxpayers.

Experts Weigh In

According to Jim Carter, former head of tax policy on Trump’s transition team, the 2 percentage point difference “would have more of a negative impact on U.S. competitiveness than appearances suggest.”

“Rate differentials matter — a lot,” said Carter, now a tax lobbyist. He explained that the average corporate tax rate among other OECD countries is 23.8 percent, but that U.S. companies also pay additional state and local income taxes, which would give them a combined 26.7 percent effective rate under the federal 22 percent rate proposal.

Carter also pointed to a December 1 release from the Alliance for Competitive Taxation, which indicates that nine OECD countries have already announced plans to reduce their corporate rates, and that by 2020, “nearly three-fourths of OECD countries would have a lower combined rate” than a possible 22 percent U.S. rate.

But for Benjamin R. Page of the Urban-Brookings Tax Policy Center, the prospect of a 2 percentage point bump in the proposed corporate tax rate cut was of relatively little consequence in terms of affecting the bill’s overall impact on economic growth.

“We don’t trade with the [OECD] average; we trade with individual countries. So it depends what the rate is relative to each of those countries, and that’s going to vary,” Page said.

Gordon Gray of the American Action Forum likewise said he doesn’t think a 22 percent corporate rate “fundamentally alters the growth argument.” But he sympathized with concerns about global tax competitiveness.

“In 1986, when we moved to 34 percent, that was moving us below the pack, and that’s where 20 percent would put us,” Gray told Tax Analysts. “If you start moving back up the pack, how long before the rest of the world gets under that? That’s the reality that this policy change acknowledges,” he said.

Gray acknowledged that the 20 percent rate is arbitrary and that “there’s no magic to it,” but he added that it was “informed by consideration” — namely, OECD rates. And he added that while there may be political or distributional reasons to want to use revenue from a 22 percent corporate rate to “goose the child tax credit,” it would not be a pro-growth change.

Page’s and Gray’s comments echo those voiced by the administration’s own top economist. Council of Economic Advisers Chair Kevin Hassett previously indicated that a 22 percent corporate tax rate would soften the desired growth effect, but that the bill would overall remain a pro-growth bill. Hassett predicted the GDP growth rate might be reduced by half a percentage point, from between 3 percent and 5 percent to between 2.5 percent and 4.5 percent, under the bill.

Follow Jonathan Curry (@jtcurry005) on Twitter for real-time updates.