President Trump has all but announced that he will accept the framework for a multinational tax deal that Canada and Mexico agreed to in July. According to one document leaked to the press, the United States would drop its existing “highest-in-the-world” 35 percent rate on corporations to 18.5 percent, then lower individual taxes for most Americans. If the Trump administration gets its way, the final deal would create a 26.5 percent corporate tax rate that would be revenue-neutral to the United States, combined with a 15 percent average rate across the economy. With domestic corporations paying a “marginal” tax rate of 19.5 percent, low-income Americans would be the ones to benefit from the rate cut on corporations.
But a global tax deal is not a done deal. Below is a summary of the deal, where possible, with the numbers (all correct) that currently appear in the leaked document. A global tax deal must still be reached by the end of the year, in order to avoid making this fiscal year’s government shutdown very difficult for federal agencies.
The deal is not complete. And, in all likelihood, none of the assumptions in this summary will become reality. Here are some possible reasons why:
The level of U.S. corporate tax rates varies drastically among other high-income tax nations. For example, the OECD average corporate tax rate was 16.1 percent in 2016, but the average is skewed by highly high-tax countries like France (37.1 percent) and the United Kingdom (31.3 percent). Mexico’s 2017 rate was 20.6 percent, Canada’s was 20.5 percent, and Japan’s was 21.5 percent. How many of these countries would agree to a deal where the U.S. dropped its current rate to 18.5 percent? Probably none. The deal still needs to clear Congress before becoming law. If the deal is not approved by Congress by the end of this year, all of this progress would be for naught.
At first glance, U.S. tax code was the only of the 11 high-income tax countries to contain a business tax rate above 25 percent in 2016, despite the extraordinary treatment of pass-through business income, which is not taxed by individual tax rates but instead is fully taxed by corporate rates. At first glance, U.S. business taxes are overly complex. But what if Congress reduced the code to three brackets instead of the current four, which would reduce the burden on many businesses but create a loophole for the very highest earners and large corporations?
The small-business segment is extraordinarily entrepreneurial. Whether it’s a father-and-son ice cream company, or a call center with a small clientele, small businesses are often the engine of the U.S. economy. What if Congress decided to repeal the entire U.S. business income tax? Why? These businesses are too small and too unique to produce a tax burden large enough to actually impact the U.S. economy. The tax code is too complex and will never be simple, so eliminate all corporate income taxes and leave everyone else with individual taxes.
It’s worth noting that the leaked framework contains few specifics for individuals. Unlike corporations, individuals are, of course, “pass-through” companies, and they are subject to individual income tax rates rather than corporate taxes. A corporate tax deal should lead to lower taxes for corporations, because those corporations will pass along lower tax rates to employees. Here’s why:
Corporations are bound by confidentiality agreements. They need to handle sensitive information in a very secure way, including confidential, tax-related information. If companies know that they are being taxed to a lower rate, they will hire more people and make more money.
Corporations’ tax rates range from 2.9 percent for entrepreneurs to 39.6 percent for oil and gas companies. Those rates will often be higher than individual tax rates. Individual tax rates in most nations are much lower, as this chart from the Brookings Institution shows. Eliminating corporate taxes could lead to lower rates for individual income.
If a global tax deal gets enacted, higher earners and business owners would get a tax cut. A President Trump administration promises to grow the economy by four percent, which it estimates would create at least $3 trillion in additional tax revenue.
There are countless more variables in this deal, but the bottom line is that a global tax deal isn’t complete, and its chances are likely much worse than the U.S. Department of Revenue would admit.
There is no doubt that some aspects of the leaked agreement are worthy of discussion. For