Washington, DC, February 25, 2013—House Ways and Means Committee Chairman Dave Camp is set to release a comprehensive discussion draft to overhaul the U.S. federal tax code later this week. The Tax Foundation has released an advisory report which highlights some of the possible economic effects of revenue neutral corporate tax reform and offers several suggestions on how legislators can implement pro-growth tax reform.
The report uses the Taxes and Growth Model to simulate the dynamic economic effects of the general goals for corporate tax reform that have been widely discussed over the past year in both the House and Senate. (Note: The Tax Foundation will be modeling the effects of Chairman Camp’s proposal once the details are released later this week.)
Key findings include:
A corporate tax rate cut to 25 percent with no offsets would increase GDP and labor income by 1.97 percent, boost the capital stock (plant, equipment, and buildings) by 5.75 percent, and create the equivalent of 391,000 full-time jobs.
Paying for the roughly $1.3 trillion static cost of cutting the tax rate, ignoring the growth effects, would require eliminating nearly every corporate tax expenditure in the code and would require further tax increases or spending cuts elsewhere.
While eliminating some tax preferences has no negative economic effects, the majority of corporate tax preferences serve to lower capital costs and thus tend to negate the benefits of the lower rate when eliminated.
In the most favorable case we simulated, eliminating most corporate tax breaks for a 25 percent rate would result in no growth.
Ways to pay for the corporate rate cut in a pro-growth fashion include: (1) offsetting some of the base broadening measures by accounting for the dynamic revenue gains from the rate cut and/or income shifting; (2) indexing longer depreciation schedules to inflation and the time value of money; (3) offsetting any revenue shortfalls from the rate cut by eliminating wasteful business subsidies on the spending side of the budget; (4) phasing in the rate cut over time.
This analysis was conducted prior to the release of Chairman Camp’s proposal and is based on the general goals for domestic corporate tax reform that have been widely discussed over the past year in both the House and Senate. Changes to international and individual tax provisions are excluded.
“To do tax reform properly, lawmakers must weigh the need for fiscal prudence against the economic benefits of cutting the corporate tax rate,” said Tax Foundation Senior Fellow Steve Entin. “In balancing the costs, they should ask what will be the economic effects of trading the elimination of various tax breaks for that lower rate. Ultimately, they must compare the net revenue and budget effects of the tax change—as the tax reform alters employment, wages, profits, and the taxes derived from them—to the net economic benefits for the population.”
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