Repealing Business Tax Preferences: Not Enough to Markedly Reduce Tax Rates

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Repealing Business Tax Preferences: Not Enough to Markedly Reduce Tax Rates

April 20, 2017 3 min read Download Report
David R. Burton
Senior Fellow in Economic Policy
David Burton focuses on tax matters, securities law, entrepreneurship, financial privacy and regulatory and administrative law issues.

Summary

The business tax code does not contain nearly as many genuine tax preferences as is usually advertised. Most true tax preferences are provisions used by individuals. Even if all genuine tax preferences were repealed, the result would merely allow an estimated three-percentage-point corporate-tax-rate reduction while maintaining the same tax revenue.

Key Takeaways

Provisions that allow businesses to deduct their capital expenses or other costs are not tax preferences.

Some business-tax preferences should be repealed: Congress could eliminate certain corporate tax preferences to offset the revenue loss of rate reduction.

But—there are only enough genuine corporate tax preferences for a three-percentage-point corporate-tax-rate reduction.

The business tax code does not contain nearly as many genuine tax preferences as is usually advertised.[REF] Most true tax preferences are provisions used by individuals.[REF] Even if all genuine tax preferences were repealed, the result would merely allow an estimated three-percentage-point corporate-tax-rate reduction while maintaining the same tax revenue.

Provisions that allow businesses to deduct their capital expenses or other costs are not tax preferences. These are legitimate business expenses that should be deductible when incurred for purposes of calculating taxable income. For example, the cost of building a factory, buying equipment, purchasing inventory, or advertising should be deductible, and tax provisions that allow such deductions are not tax preferences. In fact, the current tax system often requires businesses to delay deducting these costs, sometimes for many years.

There are, however, business tax preferences that should be repealed. Congress could eliminate some or all of the corporate-tax preferences listed in Table 1 to offset the revenue loss of rate reduction.

Corporate Tax Preferences Table

“Tax expenditures” do not truly add because of stacking and other issues.[REF] Nevertheless, the tax-expenditure figures provided above give a good sense of the likely impact on revenues. The true corporate-tax expenditures in the code amount to about $281 billion over 10 years—less than 7 percent of the $3.9 trillion that the corporate income tax is expected to raise over the same period.[REF] Thus, at best, repeal of these provisions can be expected to allow approximately a three-percentage-point rate reduction, if the objective is revenue neutrality.[REF]

Although the economic-growth effects of corporate-tax-rate reduction will be strong, they are unlikely to be self-financing. The Joint Committee on Taxation (JCT) will undoubtedly score corporate rate reduction as reducing federal revenues dramatically more than it actually will. The economic-growth effects will be larger than JCT models predict, and corporate tax avoidance will decline more than the JCT predicts.

Conclusion

Congress should repeal genuine corporate tax preferences, but there are only enough genuine corporate tax preferences for a three-percentage-point corporate-tax-rate reduction. Individual tax preferences, in contrast, are large.

David R. Burton is Senior Fellow in Economic Policy in the Thomas A. Roe Institute for Economic Policy Studies, of the Institute for Economic Freedom, at The Heritage Foundation.

 

Authors

David R. Burton
David Burton

Senior Fellow in Economic Policy

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