There's About 0% Chance Of A Permanent 20% Corporate Tax Rate

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It's looking increasingly clear that the only way the GOP will be able to make a 20% corporate tax rate permanent is with a $1 trillion-plus tax hike on individuals in the decade starting 2028.

[ibd-display-video id=2385970 width=50 float=left autostart=true]On Monday, the House GOP tax-cut bill had a gulf of more than $1.25 trillion between the cost of a 20% corporate rate and the offsetting corporate revenue-raisers in the second decade.

By the end of Tuesday, that gulf had widened to about $1.5 trillion, after the House Ways and Means Committee gutted one of its biggest proposals to help pay for a corporate tax cut, a 20% excise tax on payments from businesses in the U.S. to other affiliates of the same company overseas.

The dream of a permanent 20% rate may have died when Wal-Mart ( WMT ) and other retailers successfully killed the idea of a 20% border-adjustment tax on imports that would have raised $1 trillion in the first decade (but might have run afoul of the World Trade Organization). Profit-shifting by companies such as Apple ( AAPL ), Alphabet ( GOOGL ) and Pfizer ( PFE ) to low-tax jurisdictions is estimated to cost the U.S. government $100 billion a year in lost revenue, but the House tax bill's measure to discourage such practices through a 10% tax on high foreign returns would raise just $8 billion in 2027.

While the GOP can push through tax cuts that add $1.5 trillion to the deficit in the first decade, the plan can't add to deficits beyond 2027 to meet Senate budget reconciliation rules allowing for passage with just 50 votes - and no Democrats.

The GOP hasn't shown its cards regarding the decision about which tax cuts will be made permanent and which will expire, but it did flash a warning sign last week. On the afternoon before the House revealed its Tax Cut and Jobs Act, top tax writer Kevin Brady said that the 20% corporate rate would have to be temporary, prompting S&P 500 index futures to slide.

Miraculously, Brady reversed course late that same evening. With a permanent corporate rate cut once again supposedly in the cards, investors exhaled, and markets resumed their ascent. Yet, the numbers revealed the next day didn't add up, and they're even further from adding up now.

There's been talk for a few months that individual tax cuts would have to expire to meet Senate budget rules. But the prospect of a trillion-dollar tax hike on individuals to pay for corporate tax cuts is a much more dicey political calculation, and Brady's flip-flop suggests that Republicans are understandably reluctant to go there.

The results of Tuesday's elections in Virginia, characterized as a "bloodbath" for Republicans by Keefe, Bruyette & Woods Washington analyst Brian Gardner, will only add to pressure on Republicans "to adopt a more populist approach to the bill, which means less tax relief on the corporate side and more relief for individuals, especially among lower income levels."

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Beyond political considerations, a strategy to pay for massive corporate tax cuts with individual tax hikes could jeopardize the votes of a handful of Senate Republicans who have said they don't want the plan to add to the deficit. While the GOP can seek to provide assurance that Congress will never actually let the individual tax cuts expire, the implication is that deficits would be much higher in the long run.

Senate Republicans may reveal their own tax-cut legislation by Friday, so the sleeper issue of sunsetting tax cuts turning to tax hikes may soon be front and center.

Already, Senate Republicans are signaling that they may delay cutting the corporate tax rate for a year to direct more of the $1.5 trillion in budget space to individual tax cuts.

Anything short of a permanent corporate tax cut would have to be judged a failure, at least by the standard House Speaker Paul Ryan offered in August. "Businesses aren't doing multibillion-dollar, multiyear capital decisions if they see a tax code that's unpredictable," Ryan said in August. "The big decision-making provisions in the tax code - that stuff's got to be permanent."

A temporary, deficit-financed corporate tax cut also would likely be judged a failure by economists, meaning it would do nothing to boost growth, except in the very short term, and might be judged to shrink the economy by raising the cost of capital.

Both political pressures and Senate budget rules seem highly unlikely to produce a permanent 20% corporate tax rate. A number of Wall Street strategists have highlighted a 25% corporate rate as a more feasible fallback, and they may be right. However, even that won't be simple to get done.

For one thing, if Congress adopts a 25% corporate tax rate, instead of 20%, companies would have a bigger incentive to shift income to low-tax foreign jurisdictions, yet the GOP is already struggling to figure out how to keep companies from capitalizing on rate disparities.

Secondly, even a 25% tax rate would require a tax hike of a half-trillion or more on individuals in the second decade, unless the GOP is able to come up with more offsetting tax increases on business. Yet with a more moderate rate cut to 25%, the pushback from corporations can be expected to intensify.


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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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