Barack Obama thought a 28 percent corporate tax rate is about right. House Republicans think 20 percent would make America competitive again. Donald Trump thinks a 15 percent rate would Make America Great Again. And for comparison, Britain's prime minister Theresa May thinks 17 percent would make a Brexited UK both competitive and great again. Ireland prefers 12.5 percent, to the consternation of its high-taxing fellow-members of the EU.
For Trump it is all about economic growth. His "big beautiful wall" with Mexico is a sop to his core voters— ineffective and he knows it. That's why he was willing to give up initial funding to avoid a government shut-down. Protectionism is a great talking point to constituents whose jobs were buried under an avalanche of globalization. But those jobs won't come back: car companies continue to build factories in Mexico. "Repeal and replace Obamacare" is a promise he and Republicans in congress made, and wish they hadn't: they now own the healthcare issue, and know that losers from the change will be more vocal and telegenic than winners.
It's Trump's ability to deliver a rise in the stalled living standards of low- and middle-income voters that will determine whether his presidency is a success or a failure, foreign policy aside. To deliver that breakout from stagnating incomes he needs economic growth, and not at the paltry 1-2 percent annual rate of the recent past, the continuation of which is the consensus forecast of economists and of the Congressional Budget Office. So he has been rolling back growth-stifling regulations. Now, in addition, he needs the stimulus of a major tax cut. Given Trump's personal and political needs, he wanted it announced, even in broad outlines, in time to be counted on the plus side in the 100-days reckoning he once thought important, but now tends to shrug off in the manner of an under-performing student explaining the irrelevance of his report card.
The president has a problem. Legislative rules require that unless a cut in the tax rate is revenue neutral - offset by removal of special deductions or loopholes - or merely temporary, it must get 60 votes in the senate. Which he doesn't have, unless eight Democrats defect. But the Democrats are not about to do that, especially since they believe, quite correctly, that the President's proposals will benefit the businesses he refused to sell off when he took office. Fortunately, in congressional lingo "temporary" means expire after ten years. Even so, Kevin Brady, chairman of the key House Ways and Means Committee does not very much like using this escape from fiscal prudence: he contends that a permanent cut is twice as effective in inducing new investment and growth as a temporary cut. Trump, on the other hand, who would accept increases in the federal debt in the sweet by and by, to borrow from a Christian hymn, if necessary to get the stimulative effect of a cut in tax rates in the here and now. Nor would it bother corporate America, since most corprocrats will be enjoying their pensions a decade hence, and worry more about next quarter's earnings than the shape their companies will be in come 2027. And while on the here and now, their shareholders would benefit immediately from a new, low (as yet unspecified) rate to induce companies to bring home some of the $2 trillion in cash earned overseas and stashed there to avoid the 35 percent corporate rate. In the future, corporate overseas earnings would be very lightly taxed.
Trump does have one escape hatch. It's called "dynamic scoring." Use "static scoring" and you come up with between $2 trillion and $7 trillion in lost tax revenue over ten years. But instead of assuming that a tax cut will reduce revenues, use dynamic scoring—factor in the new tax revenues that will result from the more rapid economic growth rate produced by the tax cuts—and the deficit disappears. As treasury secretary Steve Mnuchin puts it, the tax cut will "pay for itself with economic growth," although he later added "and by reducing special interest deductions."
Stephen Moore, an economist much respected in some conservative circles, is on Mnuchin's side. He says the reduction in rates will increase the economic growth rate to at least 3 percent, the rate Mnuchin predicts the economy will reach if congress does the President's bidding. Writing in the Wall Street Journal, Moore advises, "Pass the tax cut now and stop obsessing about whether it is paid for within the short-term budget window." That "short-term" window is ten years in length.
Corporations are not to be the only beneficiaries of lower rates. Individuals will also get some relief by being allowed larger deductions, lower rates, and "simplification", the latter to be achieved by reducing the number of tax brackets applied to individual incomes. The highest earners will benefit from lower rates, but Mnuchin has promised to reduce their special deductions so that in the end their total tax bills will not be reduced. The inheritance tax, to the relief of heirs to multi-million dollar fortunes such as, er, well let's not name names, is for the chop, as is the administratively clumsy provision that requires everyone to pay at least some minimum tax. There's more, including a plan to sock it to liberal, high-tax, Democratic states by disallowing deductions for payments of state and local taxes.
Lots of good ideas for a major overhaul, including plans to tax imports but not revenues from exports, or put a tax on carbon emissions, the latter not even on the table for discussion, and an attack on the deficit have been left in the starting gate of this race to avoid troublesome complications that might derail the cuts. Unless Moore, Mnuchin and their supporters prove correct, which in this writer's view is unlikely, promises that attention will be paid to deficits will disappear into the circular file or be saved for repeating in 2020. For one thing, even if the proposed rate reductions do stimulate growth, the tax revenues they create are unlikely fully to offset the revenue lost to lower rates. Harvard economist Martin Feldstein, a reliable source in these matters, estimates that accelerated economic growth will produce only enough new revenue to make up for about 25 percent of the revenue lost as a result of lower rates. And nonpartisan critics say it would take an unattainable annual growth rate of 4.5 percent for these cuts to be totally revenue neutral. For another, with the economy at full employment and labor shortages restraining growth in many sectors, the added after-tax incomes and higher deficit might result in higher inflation rather than faster growth.
Only two things are certain. Congress will fill in this sketch and, probably, make major changes, especially if Republican deficit hawks baulk at a $2-$7 trillion run-up in the national debt. And America's favorite deductions from their tax bills - for interest on home mortgages and for charitable deductions - will not be eliminated to offset rate cuts, not now, not ever. Congress will not go where Trump feared to tread.