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December 6, 2017

Corporate Rate Cut Must Take Effect in 2018, not 2019

 

Both the House and Senate’s tax reform bills cut the corporate tax rate from 35 percent down to 20 percent, which is a major success and should have substantial effects on economic growth and retention of U.S. corporations. For a while it appeared that the Senate was toying with raising the corporate rate to 22 or 23 percent, but finally thought better of it.

But one remaining difference between the House and Senate’s bills is that the Senate bill delays the corporate tax rate cut until 2019, while the rate cut would begin immediately, in 2018, in the House bill.

It’s not surprising or problematic that the House and Senate’s bills differ, and this is not the only way in which they differ. That’s why the two bodies must now go to a conference committee to work out the differences into a single bill that both houses can pass.

Observing how difficult it’s been to get any legislation through the Senate this year, some are urging that the House simply accept the Senate bill as-is. I can understand that sentiment, but with regard to at least one detail, the Senate version would be a real problem.

If tax reform passes in late 2017 but the corporate rate cut doesn’t take effect until 2019, economist Arthur Laffer warns that many businesses may choose to wait a year and defer income and production from 2018 to 2019 to take advantage of the much lower rates.

Such a postponement, in and of itself, could slow or even tank the economy in 2018, just as things seem to be improving.

Most pointedly, 2018 is an election year, which already looks like it will be difficult for Republicans. Do they really want to make things even more challenging for themselves?

Now, it’s true that business expensing and other reforms would take effect in 2018 under the Senate bill, from which the economy should gain some benefit. But there is no compelling reason to take any risks with the 2018 economy by delaying the corporate rate cut to pay for some other provision.

The House should accept many of the changes from the Senate bill, including the Cruz amendment, which expands 529 education savings plans to pay for K-12 expenses. But other Senate details, such as doubling the child tax credit, are not worth delaying corporate rate cuts by a year and risking the economy. That won’t be good for families, either.

The House must stand firm on rejecting the Senate timeframe and insist that the corporate rate cut takes effect on January 1, 2018. If Republicans in the Senate can’t see the wisdom in this move, they may wish they had next November.


 

  • TaxBytes-New

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