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21 Percent Is Just Fine

It’s somewhat disappointing to learn that, in the final tax reform bill coming out of the conference committee, the corporate rate has been raised from 20 percent to 21 percent, apparently in order to pay for a slight decrease in the top marginal rate for high income individuals (though there may be more to it than that when we finally see all the details).

Of course, 21 percent is not as good as 20 percent if you believe that lowering the corporate tax rate will encourage economic growth (as we do), because every lost percentage point means lost economic growth. There are also technical interactions between the corporate rate and other aspects of the tax code that would be simpler with a 20 percent than a 21 percent rate.

But we’ll quickly get over this disappointment, because a 21 percent corporate tax rate is still an incredible victory and will be dynamite for the economy. Essentially, we’re lowering the corporate rate by 14 percentage points instead of 15. Two years ago, tax reformers would have been giddy at the prospects of a 21 percent corporate tax rate.

When the RATE Coalition, the major business lobby for lowering the corporate tax rate, was formed more than five years ago, its ambitious goal was to get the corporate rate down to 25 percent by mid-decade. And, because you always ask for more than you’re willing to settle for, it was assumed that most of the business community would be happy with a reduction from 35 percent down to below 28 percent.

Regardless of what you think of President Trump, his determined and consistent campaigning for a 15 percent rate changed the terms of the game. Even the most ambitious tax reformers rolled their eyes at Trump’s 15 percent—believing it would be great for the economy but certain it was politically beyond consideration.

The lesson to Republicans? Be bolder rather than timid in advocating the reforms you believe in. Circumstances do not necessarily determine what is possible; sometimes bold advocacy makes the impossible possible.

There’s every reason to believe that the low corporate rate, immediate expensing of business investment, and repatriation of overseas assets will result in a burst of economic growth, which will create jobs and raise incomes. There’s also reason to believe that these factors will not only encourage US businesses to stay in the US, but it may lead to foreign-owned businesses moving to or re-domiciling in the US through mergers and acquisitions, reversing the trend of the last two decades.

The benefits of tax reform are such that it’s worth whatever it takes to get it done—whether that involves a purely partisan legislative push, and even if it means a 21 percent corporate rate.