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Policy brief: Corporate tax reform and financial impacts on U.S. business

Trump vs. Ryan: Corporate tax reform and financial impacts on U.S. business


Two very different approaches to corporate tax reform are on offer in the United States – with widely varying financial impacts across business sectors.

In his first address to Congress President Trump promised a “big cut” in U.S. business taxes. He was roundly applauded by Republican legislators – and by the business community itself – who have long called for a more competitive corporate tax rate and a simpler and fairer tax system.

The President has made it known from an early stage in his election campaign that he would like to reduce the corporate tax rate to 15 per cent and streamline the tax system by eliminating special deductions and tax credits (except for those concerned with research and development). His intentions generally seem in line with the Blueprint for Tax Reform published last June by the Republican majority in the House of Representatives and championed by House Speaker Paul Ryan. The Blueprint would reduce the tax rate to 20 per cent, keep R&D incentives intact, and eliminate a number of other deductions and tax credits.

Both plans would need to be funded by other sources of government revenue in order not to raise concerns about increasing the government’s deficit.

But, the similarities end here. There are a number of fundamental differences between the Republican plan and that of the President that will need to be reconciled either before legislation is presented in the House or during the legislative process itself.

The differences go well beyond the level of the tax rate and what might be affordable from a fiscal perspective, although these are thorny issues themselves. At the heart of the problem are four structural changes proposed by the Republican Blueprint that would significantly alter the incidence of business taxation – the taxation of cash flow rather than of business profits, the transition from a global to a territorially based tax system, the tax treatment of net interest expenses, and the adoption of border tax adjustments.

Much attention has already been focused on the proposal to tax imports and exempt exports. Major producers of chemical products and machinery and equipment manufacturers stand to save a lot of money from border tax adjustments. Business interests in other sectors like retailing, petroleum refining, construction, and health care services would see costs dramatically increase.

But, border adjustments are just one element of the Republican plan that would create widely variable financial impacts across sectors of U.S. business. Inclusion of the full purchase price of fixed assets in the tax base and the elimination of the net interest expense deduction and foreign tax credit would also affect some industries far more than others.

When all changes are considered, the Republican Blueprint works out to be slightly more generous for business than the President’s proposals. The Ryan plan would save U.S. corporations about 0.1 per cent more of their total pre-tax revenue every year. However, the Blueprint would also lead to widely divergent financial impacts from one industry to another.

At one extreme, the Republican tax plan would save rental and leasing companies more than 29 per cent, and the pipeline industry almost 11 percent, of their pre-tax revenues. At the other, trust funds would need to pay 13 times, and the retail sector six times, more in tax than they already do under the current system.

There is considerable variation in savings and losses across other industries as well. Businesses in mining, oil and gas, chemical production, machinery, computer and electronics manufacturing, air transport, information services, investment, waste management, and accommodation services would enjoy major savings if the Republican plan were adopted. Meanwhile, industries like construction, wood products, printing, petroleum refining, furniture manufacturing, insurance, real estate, food and beverage and other personal services would end up with far heftier tax bills than at present.

In contrast, the President’s approach is far more balanced. His plan for tax reform may not be as generous for the corporate sector as a whole, but all industries would save money and the outcome would be more uniform across business sectors than under either the Blueprint or the current tax system.

The wide variation in financial impacts across business sectors created by competing tax reform proposals will greatly complicate the legislative process. The polarization of business interests between winners and losers under the Republican Blueprint, and the disappointment that will be expressed by those who expect tax reform to do more than simply deliver a lower income tax rate, will be played out within the Trump administration, in negotiations between the White House and House Republicans, and in Congress itself.

It will be a rocky road ahead for long-awaited corporate tax reform in the United States.

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