UPDATE: Trump's tax plan is one big step from reality
By Robert C. Pozen
Congress is unlikely to cut corporate taxes to 20%
While President Donald Trump's latest tax plan moves in the right direction, the math still does not work.
Earlier this week in a MarketWatch commentary (http://www.marketwatch.com/story/why-the-trump-tax-plans-fuzzy-math-doesnt-add-up-2017-09-26), I argued that Congress would likely be obliged to lower the corporate tax rate, and the related rate on partnership business income, to 25% rather than 15%. On Wednesday, Trump announced a tax framework with a 20% rate for corporations (http://www.marketwatch.com/story/trumps-20-corporate-tax-proposal-non-negotiable-mnuchin-says-2017-09-28)and a 25% rate for partnership business income.
So the president is halfway to reality. The Trump tax plan still costs $500 billion more than the $1.5 trillion deficit limit in the Senate budget resolution, which is needed to pass tax bills by 51 Senators instead of the usual 60. That problem can be simply solved by cutting the corporate tax rate to 25% from 35% -- which will still be a boon to corporate America.
Let's go over the numbers. Cutting the corporate tax rate to 20% from 35% costs $1.8 trillion.
Add another $660 billion if owners of partnerships are taxed at 25%, rather than the higher rate for ordinary income of individuals. The revenues lost by the cuts total $2.46 trillion over 10 years.
Can this $2.46 trillion be reduced by repealing existing tax preferences of business? As explained in my prior article, if Congress repealed all the industry-specific preferences in the Tax Code, that would raise $270 billion over 10 years. In addition, the Trump plan will limit the net interest of corporations, and perhaps other businesses. This could be worth about $180 billion over 10 years. The Trump plan raises another $150 billion by allowing companies to repatriate past foreign profits at a low rate.