Tax Analysts Blog

Trump Would Defy History With Out-of-Proportion Business Tax Cuts

Posted on Oct 20, 2017

In the lead-up to the Kennedy tax cuts in the early 1960s, business groups and conservatives emphasized cutting corporate taxes and rates on upper-bracket individuals. “But,” as the revered economist Herbert Stein wrote about that episode, “everyone knew there was not the slightest chance of achieving such tax reductions unless they were balanced with reductions for the lower-income taxpayers” (The Fiscal Revolution in America, Revised Edition, AEI Press 1990).

Some things never change. Currently, in poll after poll, Americans by a large majority believe that U.S. corporations pay too little in taxes, and they fear future tax cuts will favor corporations and the wealthy. Business-only tax reform may be good economics, but no member of Congress from either party will seriously consider it.

If you need more convincing, history is unambiguous. All significant business tax cuts in modern history must be accompanied by even larger tax cuts for individuals. Consider the following:

•             The Economic Recovery Tax Act of 1981, signed into law by President Reagan, was projected to cut taxes by $750 billion over the 1981-1986 period. Only 20 percent of those cuts were for business.

•             The Tax Reform Act of 1986 achieved overall revenue neutrality by offsetting $122 billion in individual income tax cuts over the 1986-1991 period with a nearly equal amount of corporate tax increases.

•             The Taxpayer Relief Act of 1997 offset approximately $390 billion of tax cuts over the 1997-2007 period with $116 billion in tax increases. All the tax cuts were reductions in individual income and estate taxes.

•             The Economic Growth and Tax Relief Reconciliation Act of 2001, signed into law by President George W. Bush, cut taxes by $1.35 trillion over the 2001-2011 period. Except for $138 billion of estate tax cuts, all the other tax relief came in the form of tax cuts for individuals.

•             The American Recovery and Reinvestment Tax Act of 2009, signed into law by President Obama, will cut taxes by an estimated $326 billion over the 2009-2019 period. The only business cuts were $19 billion of energy tax credits.

•             The Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 extended the Bush tax cuts for two years. The total estimated revenue cost was $858 billion over 10 years. Only two significant business tax cuts were included: a $1 billion extension of bonus depreciation and a $13 billion extension of the research credit.

•             On January 2, 2013, President Obama signed into law the American Taxpayer Relief Act of 2012. Estimated to reduce revenue by $3.9 trillion over the 2011-2021 period, this law permanently extended the Bush tax cuts for most taxpayers and greatly downsized the alternative minimum tax. Except for $396 billion of estate tax relief, almost all of these cuts were for individual taxes.

So there you have it: Seven major changes in tax law, all with tax relief for individuals and all with relatively small amounts of business tax relief or with none at all. And it does not seem to matter which party is in the White House or in control of Congress. When it comes to actually making law, both Republicans and Democrats strongly favor individual over business tax cuts.

Fast forward to 2017. Assuming (as expected) Congress adopts a budget resolution with reconciliation instructions close to the Senate version, total tax cuts will be limited to $1.5 trillion. Preliminary estimates indicate business tax cuts from the “Big Six” in the $4 trillion range, including a cut in the corporate rate from 35 to 20 percent. This estimate does not include promised “loophole closers” but it’s hard to believe this number can be chopped back significantly by politically viable cuts to business breaks. Meanwhile, individual tax changes outlined so far could actually result in a tax increase (though that is certainly not the drafters’ intent). The much-advertised doubling of the standard deduction and replacement of the personal exemption with an expanded child credit (potentially excellent reforms) and yet-to-be-determined brackets for reduced rates should get us back into the individual tax cutting column. But those all-important details are not yet available.

If the “unified framework” is our starting point, the president and Congress have a long way to go to get their tax cuts into alignment with history and divert the bulk of tax cuts from corporations. 

There is a full-court press by the White House to convince voters that corporate tax cuts will raise their wages, and so a corporate tax cut is really a tax cut for the middle class. But no matter how many economists you roll in, if individuals’ withholding does not appreciably shrink and the final income tax figure on their Forms 1040 is not appreciably smaller—that is, if the direct effects of tax reform do not help families--overpromising Republicans will have hell to pay.

Read Comments (2)

Mike55Oct 23, 2017

To me the special 25% tax rate for pass-through owners IS tax relief for individuals, meaning individuals are indeed getting most* of the benefit. On the other hand both parties have labeled the 25% rate a "business" item -- and only one random, anonymous commentator on a tax blog post says otherwise -- so perhaps that makes it a business item after all. Sorta like the old "if a tree falls in the forest" exercise...

Either way, once you cut through all the noise what's going to happen is quite simple: (1) high income wage earners will pay more tax, and (2) everyone else will pay less tax. If for the sake of argument we assume the actual contents of tax reform controls public opinion, then my guess is that whether Republicans have "hell to pay" depends upon the minimum household income level required to be part of the high income wage earner class.

*I assume the special 25% rate is over half of the $4T number you cite.

Edmund DantesOct 23, 2017

You've made a very convincing case that tax relief for businesses is long overdue. But I agree with you that taxpayers must see a reduction in their withholding in 2018 or the tax bill will die.

I have a couple bones to pick with this paragraph:

"On January 2, 2013, President Obama signed into law the American Taxpayer Relief Act of 2012. Estimated to reduce revenue by $3.9 trillion over the 2011-2021 period, this law permanently extended the Bush tax cuts for most taxpayers and greatly downsized the alternative minimum tax. Except for $396 billion of estate tax relief, almost all of these cuts were for individual taxes."

First, individuals pay estate taxes--sure, the executor cuts the check, but individual inheritances are reduced by them.

Second, more significant, the revenue reduction of $3.9 trillion was utterly bogus. Much of that is attributable to the assumption that the AMT exemption would lose all prior inflation adjustments and there would never be another inflation adjustment for it, because that was literally the law. Even though never in history had there not been an inflation adjustment. Even though everyone knew that making the inflation adjustments permanent was the right thing to do (because the really right thing, repeal of the AMT, was not on the table). Fixing the AMT should have been scored as a zero change to revenue, because that is what it was.

i am always upset when I see these revenue estimates cited as if they are facts, when in reality they are deliberate fictions.

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