Raising taxes on the rich is an easy way to pay for corporate tax cuts

He can afford it.
He can afford it.
Image: AP/Jae C. Hong
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Republican plans to overhaul US taxes includes a provision to cut the corporate tax rate from 35% to 20%. The House Republicans’ proposal would make the cut immediately, while the Senate Republicans’ plan would delay the cut for two years.

Though changes to individual tax rates get more attention, in financial terms the corporate tax cut is the single most important part of Republicans’ proposals. The Tax Policy Center estimates that the House plan would cost the government $2 trillion in revenue over the next 10 years.

On its face, cutting corporate taxes is a good idea. Most economists believe that it is more efficient to tax people, not companies. Taxes on companies discourage them from making investments and encourage them to move profits abroad to tax havens. There are strong arguments that lower corporate taxes would increase economic growth.

Today, companies in the US face relatively onerous corporate taxes. A 2017 report (pdf) by the US Congressional Budget Office found that effective US corporate tax rates were the fourth highest in the G20—effective rates are lower than statutory rates due to loopholes that lower tax bills.

The problem with Republican proposals to reduce corporate taxes is that the $2 trillion in cuts are not replaced by other revenues. Thus, the government would borrow money to cut corporate taxes, on the bet that the economy will grow faster and make up for the shortfall.

It almost certainly won’t. The Tax Foundation, an ideologically conservative think tank, finds that even with increased economic growth, the Republican tax plan will lead to $1 trillion in lost government revenues, and more government debt. That means that either the government would have to cut spending significantly or raise taxes in the future.

It doesn’t have to be that way. There is a very simple solution to pay for corporate cuts. Hike income taxes on the rich.

Currently, the top federal income tax rate, applied to incomes above $480,000, is 43.4%. (It is often quoted as 39.6%, but this ignores the Medicare Contribution tax.) Among wealthy countries, that rate is comparatively low.

Researchers from the Brookings Institution estimate that raising the US’s top income tax rate by 10 percentage points—in line with the rates in Japan and Sweden—would generate about $100 billion (pdf) in government revenue every year. That would pay for a large portion of the corporate tax cuts.

Critics of higher taxes on the wealthy say it would discourage them from working and decrease economic growth. This is probably not the the case—at least on any substantial level. A review of the academic literature by the IMF found that an increase in the top income tax rate is unlikely to negatively impact the US economy. And a provocative analysis (pdf) by a researcher at Uppsala University concluded that the US could raise its top income tax rate above 70% on the very rich without a significant negative impact on the economy. That could pay for some hefty corporate tax cuts.

The Republican plans do not feature a tax increase on the rich. In fact, they intend to raise the threshold for applying the highest tax rate, from $480,000 to $1,000,000. This is a missed opportunity.