By Michael C. Bender, Richard Rubin and Nick Timiraos
WASHINGTON -- President Donald Trump has ordered White House
aides to draft a tax plan that slashes the corporate tax rate to
15%, even if that means a loss of revenue and exacerbating the
procedural and partisan hurdles he faces in search of his first
major legislative victory, according to people familiar with the
directive.
During a meeting inside the Oval Office last week, Mr. Trump
told staff he wants a massive tax cut to sell to the American
people, these people said. He told aides it was less important to
him that such a plan could result in a loss of revenue, though that
could make it more difficult to pass through Congress. Mr. Trump
told his team to "get it done," in time to release a plan by
Wednesday.
Mr. Trump's push for a 15% corporate tax rate would prioritize
steep rate cuts over attempts to prevent deficits from running
higher. That choice could make it much harder to pass tax cuts that
are permanent because Republicans plan on using a procedural tool
that allows legislation to pass with a 51-vote majority in the
Senate. Under those rules, changes can't add to deficits beyond a
decade.
"It's the same discussion they had about the Bush tax cuts in
the previous administration: Are you better off having a smaller
cut that is permanent, or a larger cut that is temporary," said
Mick Mulvaney, the president's budget director, in an interview
last week.
Treasury Secretary Steven Mnuchin and National Economic Council
Director Gary Cohn are scheduled to meet Tuesday to discuss Mr.
Trump's tax proposals with Senate Majority Leader Mitch McConnell,
House Speaker Paul Ryan, Senate Finance Chairman Orrin Hatch and
House Ways and Means Chairman Kevin Brady of Texas. The meeting
comes in advance of a Wednesday announcement by Mr. Trump about his
principles for tax policy.
"This is part of our continuing dialogue with the Trump
administration on tax reform," said AshLee Strong, a spokeswoman
for Mr. Ryan.
Mr. Trump during the campaign proposed to cut corporate rates to
15% from 35%. There likely aren't enough business tax breaks that
could be repealed to offset the fiscal cost, meaning such a move
would increase budget deficits. Roughly, each percentage-point cut
in the tax rate lowers federal revenue by $100 billion over a
decade, so a 20-point cut would cost the government $2 trillion
over a decade, according to the congressional Joint Committee on
Taxation.
Any plan that adds to budget deficits would be difficult to
advance on Capitol Hill. The president's fellow Republicans, who
control both the House and Senate, are aiming to pass a tax bill
through a process known as reconciliation, which means they
wouldn't need votes from Democrats. However, bills passed under
reconciliation can't increase deficits beyond the typical 10-year
time frame against which tax and spending policies are
projected.
That makes it difficult if not impossible for Republicans to
pass a deficit-financed tax cut that doesn't expire without getting
Democratic votes in the Senate.
Some White House advisers have said changes that aren't
permanent would undercut the rationale for a corporate-tax cut,
which is to boost business investment. Businesses are "making
long-term capital decisions. People are deciding to move this to
the United States, and...they need some permanence of the tax
code," Mr. Cohn said at a conference last week.
Democrats are against large tax cuts for corporations,
especially at a time when Mr. Trump is proposing cuts to government
spending programs they prioritize, like housing, arts and the
environment.
Mr. Trump's call for a 15% corporate tax rate puts him at the
low -- and possibly unrealistic -- end of recent proposals. Former
President Barack Obama sought a 28% rate for most companies. A 2014
Republican plan had a 25% corporate rate. And House Republicans
want a 20% rate, with the cost covered by including a
border-adjustment feature that taxes imports and exempts exports.
Mr. Trump's White House has sent mixed messages about whether it
would support the border-adjustment plan.
Asked Monday if the president's tax plan would be
revenue-neutral, meaning it wouldn't add to the debt, Mr. Mnuchin
told reporters that it would "pay for itself with economic growth."
By that he meant that the administration expects to be able to
project faster growth due to tax cuts, which would in turn increase
revenue and avert the risk of bigger budget deficits. Many
economists doubt whether economic growth can ramp up on a sustained
basis without a big pickup in productivity and labor-force growth,
and it is uncertain the tax-policy changes would do that.
"They will lose a boatload of revenue that we can't afford to
lose and far more than this team will offset by closing loopholes,"
said Jared Bernstein, who was an economic adviser to former Vice
President Joe Biden. Cutting marginal tax rates for businesses
could generate some economic growth, he said, but not nearly enough
to pay for itself with increased revenue.
"These promises about all kinds of growth and investment that
are going to be triggered by these tax cuts never appear, and the
empirical historical record is clear on that," Mr. Bernstein
said.
Mr. Trump, so far, is sticking with core elements of his
campaign plan when it comes to the tax issue, showing no signs of
molding political promises to legislative dynamics in Congress or
any significant fiscal constraints. Mr. Trump's aides have been
working on a detailed tax proposal, but that isn't ready yet.
The announcement on Wednesday is expected to focus instead on
broader principles, including proposed changes to the individual
tax rates. Mr. Trump has said he wants to reduce the number of
brackets for individual payers, and also to deliver tax cuts to the
middle class.
Mr. Trump's statement last week that he would announce details
of his plan later this week caught his team off guard, said people
familiar with the matter.
In an interview with the Wall Street Journal on April 12, Mr.
Trump said he wouldn't release even a set of tax principles before
Congress passes major health-care legislation, which hasn't
happened. The timing was also a surprise because, for weeks, top
advisers in the White House have said they would like to forge
consensus with lawmakers on a single plan before releasing more
details.
The U.S. has the developed world's highest statutory corporate
tax rate, and advocates for lower corporate tax rates say the
system discourages job creation and investment in the U.S.
Including state and local taxes, the U.S.'s corporate rate is
39.1%, according to the Congressional Budget Office.
Over the past decade, other countries have been lowering their
tax rates to attract corporate investment, while the U.S. has left
its federal rate at 35%. American companies have thus increasingly
found ways to book their profits in low-tax foreign
jurisdictions.
The gap in corporate tax rates between the U.S. and other
countries is smaller under a measure that looks at taxes as a share
of income after deductions and other breaks, also known as the
average rate. In 2012, the U.S. average tax rate was 29%, according
to a recently released CBO study. That still ranked third highest
in the G20, and the U.S. rate was more than 10 percentage points
above Australia, Canada, Germany and the U.K.
The actual tax rates paid by companies vary widely, with global
high-tech and pharmaceutical companies paying relatively low rates
and retailers and primarily domestic firms paying higher rates.
Write to Michael C. Bender at Mike.Bender@wsj.com, Richard Rubin
at richard.rubin@wsj.com and Nick Timiraos at
nick.timiraos@wsj.com
(END) Dow Jones Newswires
April 24, 2017 17:10 ET (21:10 GMT)
Copyright (c) 2017 Dow Jones & Company, Inc.