The tax bill’s original sin

As we head toward the Senate’s tax bill endgame, the GOP finds itself forced to choose between a couple of unappealing options. On the one hand, you could vote in favor of an unpopular corporate tax cut that raises middle-class taxes and violates a number of key campaign promises. On the other hand, you could accept a humiliating defeat on your party’s signature tax issue.

Not great.

But even as Republicans continue to tinker with the plan to try to resolve the dilemma, they are totally unwilling to revisit the core choice that’s landed them here — the decision to cut the corporate income tax rate from 35 percent all the way down to 20 percent.

The irony, or perhaps tragedy, here is that the basic concept of a significant cut in the corporate rate is totally sound and reasonably bipartisan.

The reason for these numbers is that if you look at the difference between the statutory corporate tax rate and the effective rate of taxes the government actually collects, you quickly reach the conclusion that base-broadening corporate tax reform could pay for a rate cut down to somewhere in the high 20s. Getting that done is still hard work politically. But it makes sense as policy, and in a general sense it’s broadly supported.

But when you push to 20 percent, all kinds of problems arise. You need to blow up the deficit, pair with unpopular spending cuts, or pair with unpopular middle-class tax hikes. And precisely because you’ve now cut the corporate rate too low, you’ve generated a lot of spurious problems regarding whether pass-through businesses are receiving equitable treatment.

It’s true that 25 percent would put us at the OECD average corporate rate rather than below it like the aspirational 20 percent rate. But it’s also true that most big rich countries (Japan, Germany, France, Canada, Italy) have above-average rates, since bigger and richer countries are less exposed to international capital mobility than smaller and poorer ones, and the United States is both very big and very rich by OECD standards.

More broadly, stepping back from things, if Congress passed a corporate tax reform that slashed the statutory rate from 35 percent to 25 percent, that would be a big deal. Nobody would be saying, “Those clowns haven’t accomplished anything”; they’d be saying, “Those guys achieved once-in-a-generation tax reform,” which is exactly what they hope we’ll say if they pass their cut to 20 percent. Except at a 25 percent rate, you could get the job done without including toxically unpopular provisions, and since it wouldn’t be toxically unpopular, you’d probably get some Democratic votes too.

The crazy thing is, even at this late hour it’s not too late to change this. Forget the unworkable trigger idea. Replace the 20 percent rate with a 25 percent rate. Plow the extra revenue into a mix of smaller deficits and more generous treatment of the middle class. Remind corporate America that a 25 percent rate is literally what they were asking for two years ago. And remind everyone that if Republicans cut all the way down to 20 percent and then lose power because only a crazy person elects a Republican Congress in order to see middle-class taxes go up, Democrats are going to pay for the next round of welfare state expansion by partially repealing the Trump tax cuts anyway.

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