With President Trump’s reelection and Republican control of both the Senate and House of Representatives, tax policy will be back in the news. A top priority for Republicans will be extending the individual income tax and estate tax provisions of the 2017 Tax Cuts and Jobs Act (TCJA), almost all of which expire at the end of 2025. 

But corporate tax changes may not be far behind. Trump has proposed enacting a handful of new corporate tax cuts and some of the provisions enacted in 2017 may be reconsidered as well. Here are four things to look for in the upcoming debate over corporate taxation. 

Budget process 

How Republicans change the tax code will hinge crucially on budget process considerations. Because the GOP will not hold a 60-vote majority in the Senate, any partisan tax legislation will need to pass via “reconciliation,” a process that requires only a simple majority. To use reconciliation, Congress must first adopt a budget resolution that sets overall spending and revenue targets for the fiscal year. The budget resolution determines the size of any tax cuts in the reconciliation bill. The reconciliation bill must comply with the Senate’s “Byrd rule,” which prevents changes to non-budget items or Social Security and prohibits any legislation that would increase deficits beyond 10 years. 

These constraints have implications for the size and structure of corporate tax cuts.   

First, to comply with the Byrd rule, any permanent corporate income tax cut must be offset by a tax increase or a reduction in spending. 

However, opting for temporary policy to comply with the Byrd rule is not feasible for corporate tax rate cuts. The Joint Committee on Taxation has scored previous temporary corporate tax rate cuts as losing revenue outside of the budget window because some companies are able to shift profits forward to benefit from lower tax rates, reducing revenues in future years. Thus, temporary rate reductions would still violate the Byrd rule and would need to be offset. 

Second, given any level of deficit increase specified by the budget resolution, corporate tax cut priorities could be crowded out by more politically popular individual income tax cuts. Notably, permanently extending the TCJA provisions is estimated to reduce federal revenue by $4.6 trillion over the next decade. Lawmakers will already have significant difficulty finding ways to extend these provisions before considering any additional corporate tax cuts. This will likely limit the scope of any corporate tax cuts in a reconciliation bill. 

The tax base 

There are a handful of changes to the tax base that lawmakers will likely address. The TCJA allowed full expensing of equipment investment, but that provision began phasing out in 2023. It also placed limits on interest deductions and, starting in 2022, restricted the tax benefits for research and development costs (requiring amortization instead of expensing). Last year, a bipartisan tax bill would have temporarily delayed all these tax increases. 

If lawmakers want to focus on economic growth, they should focus on changes to the corporate tax base that enhance efficiency, including extending the 100 percent bonus depreciation and reversing the move toward amortization of research and development expenses. At the same time, they should further restrict the limits on interest deductions, not expand them. These changes would move toward full cash-flow taxation, which would eliminate the net taxation on new investment, regardless of the statutory tax rate. 

The tax rate 

During the campaign, Trump proposed reducing the corporate income tax rate to 15 percent. However, his comments made it unclear whether this would be a reduction in the statutory rate or a targeted rate for manufacturers. 

When the TCJA cut the top corporate to 21 percent from 35 percent, the U.S. went from having the highest statutory tax rate among the 35 countries in the OECD in 2017 to being roughly in the middle of the pack. If the rate were cut further to 15 percent, the United States’ statutory rate would be among the bottom third of OECD countries. 

A 6-percentage point reduction in the corporate tax rate would be expensive. Permanently cutting the corporate income tax rate to 15 percent, for example, would cost at least $600 billion over the next decade. 

While a corporate tax rate reduction can increase incentives to invest and can reduce incentives to shift profits overseas, much of the tax cut’s benefit is a windfall to previously existing investment because a firm’s income in a given year is typically based on investments made in the past. As a result, it is a much more costly way to encourage investment compared to expensing. Notably, this is why firms prefer corporate tax cuts over investment incentives—they receive tax breaks without needing to take any additional action. 

It is also possible that Trump would limit the lower rate to income from domestic production. This could be enacted by reintroducing the Domestic Production Activities Deduction (DPAD), which existed from 2004 to 2017 and allowed deductions for a portion of income associated with domestic goods production, providing, in effect, a lower tax rate on this income. Applying the 15 percent rate only to income from domestic manufacturing would lose less revenue than a full rate cut but would still cost more than $350 billion over ten years. It would also open up opportunities to game the system. The previous version of this policy ended up being so broad that companies could qualify for the “manufacture” of goods such as hamburgers. 

Regardless of its structure, a lower corporate tax rate could put pressure on lawmakers to cut taxes for other businesses. In 2017, a deduction was introduced for income from pass-through (i.e., non-corporate) businesses. The motivation was that since the corporate rate was being reduced, the tax rate on non-corporate businesses should be reduced, too, to establish equity across different forms of business. In practice, the deduction has proven expensive, regressive, and unhelpful in achieving its goals. However, following the 2017 logic, a cut in the corporate rate may lead to an increase in the deduction for pass-through businesses. 

Foreign income provisions 

Lawmakers may also address the tax treatment of multinational corporations. The TCJA moved towards a more “territorial” tax system, which exempts the foreign profits of U.S. multinational corporations from taxation but places a minimum tax on the profits of foreign multi-nationals. The tax rates on multinationals are scheduled to rise under the TCJA at the same time as the individual provisions of the TCJA are set to expire. In the meantime, many countries have started to enact the minimum tax that the Biden administration negotiated with the OECD. 

Trump has not proposed any direct changes to the taxation of multinational corporations, but lawmakers are still likely to address the pending tax increase by delaying it, reducing it, or eliminating it. Furthermore, Republicans oppose the OECD minimum tax and want to impose retaliatory taxes on nations that subject U.S. companies to certain provisions of the minimum tax. Trump generally supports retaliatory provisions, and they may go hand-in-hand with his call for higher tariffs. 

Retaliatory taxes could end up being counterproductive. There are dozens of ways to improve the treatment of multinational corporations that do not risk igniting a trade war. 

This blog was published as Commentary by the Brookings Institution on Nov. 21, 2024.