Trump’s 15% Corporate Tax Rate Promise

Former President Trump announced in an interview with Bloomberg last week a desire to reduce the corporate tax rate to 15%.

Prior to the 2017 Tax Cuts and Jobs Act, the corporate tax rate was 35%. The TCJA reduced the rate to 21% and Trump has campaigned on a promise to drop the rate to 20%.

But will dropping the corporate tax rate to 15% bode well for the economy?

On one hand, it puts money in the hands of better allocators of capital (businesses). It will certainly make the U.S. an attractive economy to invest and do business in.

On the other hand, it will create a large deficit unless other tax changes are made to expand the tax base.

Here are the pros and cons of dropping the corporate tax rate to 15%.

(And if you want to track all the tax promises the presidential candidates are making, bookmark our tracker page).

Positive Impact of a 15% Corporate Rate

Research has shown high corporate tax rates are damaging to growth and wages. Higher rates reduce business profits distributable to shareholders and creates a disincentive to invest in growth.

Reducing the corporate tax rate to 15%, per the Tax Foundation’s research, would boost long-run GDP and wages by 0.4%. It would also create 93,000 jobs.

Analysis by the Center for American Progress Action (CAPAF) estimates that Trump’s 15% corporate tax rate would give the largest 100 U.S. companies an annual tax cut of $48 billion.

Trump has been meeting with top CEOs in the U.S. so, perhaps, the 15% corporate rate is a promise intended to win more of them to his side.

Regardless, such a move would create more profits for business and bode well for the U.S. economy.

Downsides of a 15% Corporate Rate

Of course, we have to ask: how will the U.S. pay for this?

The Tax Foundation estimates reducing the corporate tax rate to 15% will increase the federal deficit by $673 billion over the next ten years.

After factoring in the economic growth, the net deficit would be $460 billion.

The Joint Committee on Taxation and U.S. Treasury estimate that reducing the corporate tax rate from 21% to 15% would cost approximately $1 trillion over 10 years.

It would be an expensive policy and makes you wonder if this is the best way to drive economic growth.

Extending R&D expensing and bonus depreciation, for example, is an alternative way to drive economic growth without creating large tax deficits. This is because deductions related to R&D and bonus depreciation create a timing difference.

In the long run, tax revenue would not be significantly impacted.

The Way Forward?

If a 15% corporate tax rate were to make it through Congress, it would need to come with additional changes to the Internal Revenue Code to expand the tax base.

Most likely, the corporate rate will remain at 21% and we will see tax policy focus on extending prior tax cuts from Trump’s 2017 Tax Cuts and Jobs Act.