Republican presidential nominee Donald Trump recently proposed cutting the current 21 percent corporate tax rate to 15 percent. The lower rate would apply to some, but not all, US companies. Companies that “outsource, offshore or replace American workers” would not be eligible.
The Trump campaign has not yet indicated how this rate would be structured or enforced, but, drawing on past experience and research evidence, TPC staff below suggest some issues to consider.
1. The idea sounds familiar. Is it like the domestic production activities deduction? TPC’s Bill Gale notes that the domestic production activities deduction was intended to provide tax incentives for businesses that produce most of their goods or employ more workers in the United States rather than overseas. Between 2005 and 2017, businesses could deduct up to 9 percent of income earned from qualifying domestic activities, including construction, film production, and architectural services. Congress repealed the deduction in 2017 upon the introduction of the Section 199A qualified business income deduction for pass-through businesses.
2. Is it feasible? How might policymakers design a separate tax on income from products made in the US? TPC’s Steve Rosenthal observes that because current US corporate tax rules are based on the source of income, domestic or foreign, “we would need to slice domestic income further, income from domestic production vs. from other domestic income.” He thinks the old section 199, now repealed, would be a good start, but continues, “I think returning those rules would add a lot of complexity… That, in part, is why Congress repealed section 199 in 2017. And foreign investors, who now own more than 40 percent of US corporate equity, may be the surprise winners from slashing US corporate taxes further.”
3. Would the different rates change the way corporations file taxes? TPC’s Janet Holtzblatt envisions two different tax returns (or at least one form with two different tax rate schedules). One form could be for corporations that only produce domestically, and another form could be used by corporations with any foreign income. “It might not look too complicated, but corporations might restructure to the extent possible to take advantage of the lower rate, for example, by creating a subsidiary with activity limited to US production.”
4. How many domestic corporations would actually pay the new, lower tax? TPC’s Eric Toder raises the issue of domestic corporations that use imported parts. “They might have no foreign-source income, but much of the value added of the products they sell might have been generated elsewhere.” TPC’s Howard Gleckman concurs, noting that Trump describes the rate as applying to companies with items “fully made” in America. “That would seem to capture foreign inputs. If so, I wonder how many C corporations would meet the standard?”
5. Are there more direct approaches to achieving the same goal? TPC’s Joe Rosenberg observes, “Feasibility and implementation issues aside, this goes against prior Republican-led and TCJA approaches of moving toward a territorial system. What do you call an international tax system that exempts domestic income and only taxes foreign income? An import tariff (which Trump has already proposed).”
Learn more about corporate income taxation from TPC’s Briefing Book, available here.
