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Trump wants to slash corporate taxes. Here's what both sides have to say.


Updated December 13, 2017 03:33 PM EST

The most notable point from President Donald Trump's speech on tax reform was his claim that effects would be seen as early as February if he is able to sign a bill by Christmas.

Congress has been rushing through a consolidated bill at a pace that was recently quickened after Republican candidate Roy Moore lost his senate bid in Alabama on Tuesday night. Trump made claims that the middle class would see significant tax cuts, however, some experts claim the bill will also add a huge amount to the deficit. Additionally, the new plan is expected to slash corporate tax rates from 35 percent, the highest among advanced economies, to 21 percent. That's one percent more than Trump initially pushed for.

Trump claimed that Congress is just "days away" from reaching a final deal. A so-called "tentative" agreement was made earlier Wednesday before Trump's speech, though actual text is not expected until sometime around Friday afternoon.

Updated December 13, 2017 03:04 PM EST

Let's be honest, few people are fired up about something as mundane as the corporate tax rate, but President Donald Trump's plan to cut it could have profound economic effects. We waded through the details to shed some light on what's going on.

Basically, Trump wants to drop the corporate tax rate to 20 percent. His argument, along with other tax cut supporters, is that the substantially lower rate will attract companies to invest stateside.

Such a cut would be monumental considering the U.S. currently taxes corporations at a hefty 38.9 percent. That's the highest among nations with advanced economies. Tax cut supporters argue that this rate is exorbitant, and encourages corporations to go elsewhere to set up shop. But others note corporations do not necessarily pay that rate across the board.

Why the difference?

There are statutory tax rates that are on the books, and there are what are called "effective" tax rates, or what is paid after deductions and credits. After those are included, what is actually paid can be significantly lower. In fact, they bring the rate to around 18.6 percent, which brings the U.S. to a more equitable level with other countries.

So what's the problem?

Companies are still leaving U.S. shores by moving their official headquarters abroad in pursuit of significantly lower rates. According to CNN Money, approximately 47 companies left the U.S. for cheaper taxes abroad between 2004 and 2013. That's a significant rise compared to the 29 which left from 1983 to 2003.

One of the major points of contention is the fact that the U.S. uses a global tax system. That means that if you are a U.S. company, you not only get taxed at the U.S. rate for your local earnings, but also any money that you make abroad. That said, those foreign earnings are not taxed until they are moved back to the U.S.

Screen Shot 2017-12-12 at 4.56.03 PM.png
Includes local taxes. Source: OECD

It's a pretty unusual system, considering most U.S. competitors tax at a local rate and exempt foreign income. That means if you are headquartered in Ireland, you pay the low corporate tax rate of 12.5 percent for money made in Ireland while the money you make in say, the U.K., would be taxed at their local rate of 19 percent.

"Every country has a lower corporate tax rate than us, and we are really shooting ourselves in the foot because we are losing investment opportunities in this competitive global economy," Chris Edwards, director of tax policy studies at the Cato Institute, told me in an interview.

The U.S. hasn't had a major tax overhaul since 1986, before many reading this were even born. Edwards noted foreign economies took notice of that overhaul, and began slashing their corporate rates and updating tax codes to better compete. The U.S., being such a dominant economy, has not really taken notice until recently. U.S. lawmakers are now having to play catch up.

Inversion, the taxation magic trick

There's a bit more to moving your company abroad than simply packing up and setting up shop at a foreign address.

Say you are the head of a major U.S. corporation and you want to relocate to lessen your tax burden as simply as possible. One of the simplest ways to do that is to do an inversion. All you would need to do is merge with a foreign company and either hand over your one-fifth of your ownership to the foreign owners or do 25 percent of your business abroad. And then PRESTO! You're now a foreign company paying a cheaper foreign tax rate, all the while changing very little of your day-to-day operations.

Inversion isn't the only way to go abroad, but more than two dozen companies have done it in the last twenty years, including some big names like Fruit of the Loom and Tyco.

What do we do about it?

There are two main arguments. Conservatives like Speaker of the House Paul Ryan and Trump have pushed for slashing corporate tax rates in an effort to incentivize corporations to stay. Trump has even proposed a repatriation plan which would offer corporations the opportunity to bring their funds back to the U.S. at a substantially lower rate. This would encourage skittish corporate leaders to invest in the U.S. economy, according to Edwards.

Richard Phillips, senior policy analyst at the Institute on Taxation and Economic Policy, has another suggestion.

"What I am proposing is kind of the opposite," Phillips told me in an interview. "Which would be to say, we should be taxing all of these offshore profits at the same rate, at the same time and kind of get rid of deferral which is what we see as the real problem."

This would allow the government to invest in infrastructure and create a more equitable economy, according to Phillips.

Some want to tighten up the laws to restrict corporate inversions altogether. Michigan Democratic Rep. Sander Levin has been the torch-bearer on this policy, having introduced legislation as recently as this summer. He has claimed that previous versions showed that new restrictions could save the U.S. $34 billion.

Tax reform bills have passed both the House and the Senate. It's now up to Congress to consolidate the two bills in order to give Trump something to sign. The details still need to be hashed out, but one thing is clear: corporate tax rates are going down, for better or worse.

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