President Donald Trump is about two months away from discovering how complicated corporate tax cuts can be.
Why so long? Well, Trump looks like he’ll be pretty busy the rest of the summer finding out how tricky golf, avoiding a nuclear apocalypse, and not voluntarily defaulting on our debt all can be. At some point, though, Trump also will learn that the centerpiece of his ever-shrinking tax plan — slashing the corporate tax rate from 35 to 15 percent — is all but impossible. At least, that is, if he wants it to last more than a few years.
Now, there are three reasons for this. The first is that Republicans want to pass their tax bill with just 51 votes in the Senate instead of the 60 it takes to beat a filibuster, which, because of legislative rules, means that it has to be fully paid for outside of the 10-year budget window, or else expire when it’s not. The second is that Republicans can’t actually agree on any way to pay for any of their tax cuts. They spent a few weeks talking about closing the $1 trillion loophole that lets businesses deduct their interest expenses, before Trump ruled it out. Then they spent a few months talking about a new $1 trillion tax on imports, before congressional Republicans ruled it out. And now they’re talking about maybe getting rid of the $1 trillion state and local tax deduction, before, well, we’ll see. Presumably some of them would remember that they represent what would be hard-hit states like New York, New Jersey and California.
The third is that even a short-term corporate tax cut would lose quite a bit of money in the long-term. Indeed, the nonpartisan Joint Committee on Taxation estimates that cutting the corporate tax rate to 20 percent for just three years would still result in a “nonnegligible loss of revenue” after 10 years. This, of course, would be even more of an issue if they cut it to 15 percent like Trump wants. Why, though, would a tax cut that, economically speaking, wasn’t around much longer than Anthony Scaramucci keep costing us money well into President Ivanka Trump’s first term? Two reasons. First, companies would have more tax credits to carry forward, since, with the lower rate, they wouldn’t need to use as many of them now. And second, they wouldn’t have as many overseas profits to potentially pay a high rate on given that they would bring a lot of them home at the temporarily reduced one.
So unless Republicans can come up with some tax breaks they would be willing to get rid of, they won’t be able to cut corporate taxes for more than two years. And by “some,” I mean $3.5 trillion worth. That’s how much the nonpartisan Tax Policy Center thinks Trump’s corporate tax cut would cost outside the 10-year budget window. Republicans, remember, have agreed on approximately zero dollars worth so far.
The most likely outcome, then, is that Trump will try to pass the most pointless tax cut of all time. That, after all, is what a two-year corporate tax cut would be — at least according to the people who support a permanent corporate tax cut. It’s a matter of incentives. A permanent cut, you see, would make it cheaper for businesses to invest their money, which, in theory, should make them invest more money, and, in turn, make the economy grow more than it otherwise would. A temporary cut, though, would only make it cheaper to invest for a little while before businesses would have to worry about it becoming more expensive again — so they wouldn’t change their behavior all that much. Whatever boost the economy got from this lower tax rate would, by the conservative Tax Foundation’s calculations, be almost entirely wiped out by that tax rate going back up. It would just be the equivalent of “dropping cash out of helicopters onto corporate headquarters for a couple years,” said George Callas, the top tax adviser to House Speaker Paul Ryan, R-Wisconsin. That might sound OK to Wall Street, but not to anyone else.
When you think about it, this is actually a pretty remarkable achievement. Trump has found a tax cut for the rich that even Republicans might not be able to pretend would trickle down to everyone else. And it wasn’t even that complicated.
All you have to do is know nothing.
Matt O’Brien writes about economic affairs for The Washington Post’s Wonkblog. He was previously a senior associate editor at The Atlantic.