The voices of Tax Policy Center's researchers and staff
Yes, Congress Could Tax Business At 15 Percent In A Revenue-, Distributionally-, and Economically-Neutral Way.
The tax outline proposed by President Trump last April, built around a 15 percent business tax rate, has three deep flaws: It could add more than $8 trillion to the federal debt over the next decade; would be very regressive, distributing half its benefits to the highest income one percent of households; and it would distort economic incentives.
But what if Congress could enact that very low business tax rate and avoid all those problems? What if it even included elements of the tax plan proposed by the House Republican leadership in June, 2016 and curb the double-taxation of corporate dividends, an idea favored by Senate Finance Committee Chair Orrin Hatch (R-UT).
Impossible, you say? My Tax Policy Center colleague Jim Nunns disagrees. He’s designed a stylized tax plan that takes key elements of the Trump outline, the House Republican leadership’s 2016 blueprint, and Hatch’s idea and made it revenue-, distributionally- and economically-neutral.
The plan has six key elements. It would:
- Cut business tax rates to 15 percent. The rate would apply to certain pass-through entities (partnerships and LLCs) as well as corporations.
- Integrate the tax on business entities with the tax on business investors to prevent business income from being double-taxed. All pass-through income would be treated as distributed to owners.
- Tax dividends, capital gains, interest, and the income of pass-throughs at the same rates that apply to wages. The system would take into account deferral of tax on capital gains to achieve economic neutrality with taxation of other income.
- Create a 7.5 percent business-level consumption tax, or Business Transfer Tax. The tax base is total sales less total purchases from other firms, so all investments are expensed but firms could not deduct interest costs. It also includes wages and fringe benefits such as employer-sponsored health insurance, unlike the consumption tax in the House Republican leadership plan.
- Repeal the employer payroll tax for both Social Security and Medicare. Repeal the employee share of the Medicare tax but retain the employee share of the Social Security tax. Continue to transfer current law amounts to the trust funds.
- Repeal the Affordable Care Act’s taxes including the Net Investment Income Tax, as well as the corporate and individual alternative minimum taxes, and some business tax preferences.
Jim’s plan does not directly set individual income tax rates or address other key elements of the individual income tax such as the standard deduction, itemized deductions, personal exemptions, or refundable credits. However, for purposes of calculating the cost of such a plan, it assumes the House leadership’s proposed rates of 12-25-33 percent, a $24,000 standard deduction (for joint filers), and repeal of itemized deductions except for mortgage interest and charitable giving.
Jim’s plan is a broad framework aimed at illustrating that a Trump-like business rate is possible. But it also shows the kinds of changes required to make low business tax rates revenue-, distributionally-, and economically-neutral. It would not be easy and would require some difficult decisions about corporate and individual income taxes, payroll taxes, and adoption of a business-level consumption tax.
Posts and comments are solely the opinion of the author and not that of the Tax Policy Center, Urban Institute, or Brookings Institution.
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