(Bloomberg) President Donald Trump’s plan to slash the corporate tax rate to 15 percent is setting up a showdown with House Speaker Paul Ryan, who has called for a tax plan to pay for itself.
Trump intends to lay out broad tax principles on Wednesday, including cutting the federal corporate tax rate to 15 percent from 35 percent, a White House official said. A rate that low would make it difficult to find ways to increase revenue or eliminate deductions to offset it—that means a plan wouldn’t be revenue-neutral, or permanent.
The Ryan-backed House GOP blueprint released in June calls for replacing the 35 percent rate with a 20 percent rate applied to companies’ domestic sales and imported goods, while exempting their exports. Ryan has questioned whether a 15 percent rate can realistically be paid for, and he and Kevin Brady, chairman of the tax-writing House Ways and Means Committee, have said they’re committed to revenue neutrality.
The Urban-Brookings Tax Policy Center estimates that cutting the corporate rate to 20 percent would lower federal tax revenue by $1.8 trillion over a decade, while cutting it to 15 percent would decrease revenue by $2.4 trillion.
“It’s hard to imagine you’re going to make that revenue-neutral,” Roberton Williams, an expert with the Tax Policy Center, said, referring to a 15 percent corporate rate.
“It’s a big number. The kind of changes you’d need to make to claw that much money back are not consistent with the kinds of things Trump has talked about,” Williams said. “They’d have to do something that raises taxes elsewhere.”
It’s unclear what kind of revenue raisers Trump’s plan will include. He isn’t likely to endorse a border-adjusted tax in Wednesday’s plan, a senior administration official said last week. The border-adjusted tax is a centerpiece of the House GOP plan because it’s estimated to raise $1.1 trillion over a decade, helping to pay for individual and corporate tax cuts. And Trump hasn’t called for doing away with corporate deductions for interest, as laid out in the House plan—that would raise an estimated $1.2 trillion over a decade. Instead Trump and senior officials have touted the economic growth that would result from the cuts.
If a tax overhaul adds to the deficit after the initial 10-year window, it’s likely to run afoul of Senate budget rules for what can pass the Senate with a simple majority. Republicans have 52 members in the chamber; they can only spare two votes.
“It produces a lot of uncertainty for businesses. You can’t completely redesign the budget tax system for nine-and-a-half years, and then flip it back in 10 years,” Ryan said in February during a PBS NewsHour interview. “We do envision revenue-neutral tax reform that is permanent.”
White House economic adviser Gary Cohn and Treasury Secretary Steven Mnuchin are expected to meet with Republican leaders Tuesday on Capitol Hill to go over the president’s tax plan. Cohn and Mnuchin have said they’ve been meeting with congressional leaders on tax issues, but the announcement about a tax plan coming Wednesday was said to be a surprise.
Senate leadership seemed skeptical of a business rate of 15 percent, which was part of Trump’s campaign tax plan. Senate Finance Chairman Orrin Hatch said he doubted that a corporate rate that low could be achieved.
“I’d like to, but I don’t know,” he told reporters on Monday.
“It’d be great if we could get there,” said Senator Pat Toomey, a Pennsylvania Republican. He declined to comment on whether tax reform should be revenue-neutral.
Douglas Holtz-Eakin, a Republican economist and president of the American Action Forum, said Trump campaigned more on tax cuts than revenue-neutral tax reform. He said the White House’s demands will be central to the debate.
“The only way tax reform gets done is to have tremendous White House involvement, effort and persuasion,” Holtz-Eakin said.
Mnuchin indicated on Monday that the administration is less concerned with tax cuts adding to the deficit. He said the president is “very determined” that the U.S. can achieve sustained annual economic growth of 3 percent or greater, which would pay for the tax cuts along with “trillions of dollars” brought in from offshore havens.
The Tax Policy Center’s Williams was doubtful: “History belies that,” he said. “We haven’t seen tax cuts that actually pay for themselves.”
—With assistance from Terrence Dopp