The top 1 percent would be the big winners of Romney's one trillion dollar corporate tax cut
Mitt Romney doesn't want to cut your taxes, but there is one group of people whose taxes he does want to cut. Corporations, my friend.
Ask anyone in Washington, and they'll tell you our corporate tax code needs an overhaul. It's a loophole-ridden mess with a high headline rate that hardly anybody pays -- if they pay anything at all. President Obama has proposed cutting the rate from 35 to 28 percent while eliminating enough preferences -- you can read which ones here -- to actually increase revenue. That sounds similar to what Romney wants to do, but it's not. Yes, Romney also wants to streamline the system, but he wants to do so in a pricey, two-part process. Here's how his advisers told the nonpartisan Tax Policy Center it would work.
Step 1: Cut the corporate tax rate from 35 to 25 percent, make the research credit permanent, allow full expensing on capital expenditures for one more year, and enact a repatriation tax holiday.Step 2: Cut the corporate tax rate again by an unspecified amount, cut corporate tax preferences, and move to a territorial tax system.
This looks like a pretty standard tax reform -- cut rates and preferences, blah, blah, blah -- but look again. Romney only cuts preferences in the second step. The first step is not paid for. This is not a mistake; this is the plan. At least according to his advisers. Setting aside one-time costs like the repatriation tax holiday, the Tax Policy Center figures Romney's initial rate cut would reduce revenues by $96 billion in 2015 alone -- or nearly a trillion dollars over a decade. Who are the lucky flesh and blood people who would benefit from this 13-digit tax cut? That's a tricky question to answer, but the latest figures from the Tax Policy Center estimate that 53 percent of the corporate income tax falls on the top 1 percent. In other words, this $96 billion corporate tax cut would be a $51 billion tax cut for the top 1 percent. That's good for an average cut of $43,440 for each household in the top 1 percent, going by these 2015 Tax Policy Center distributional tables.
But the red ink doesn't stop with a half a trillion worth of tax cuts for the top 1 percent. There's also the repatriation tax holiday. That would cost a comparatively modest $79 billion over ten years, according to the left-leaning Center on Budget and Policy Priorities. Here's how it works. Right now, corporations have to pay the difference between our corporate tax rate and overseas corporate tax rates when they bring overseas profits back home. A repatriation holiday is just what it sounds like -- it lets corporations bring foreign profits here while paying much, much less in tax. The Bush administration tried this in 2004, and it was a total flop. The idea was returning capital would jumpstart jobs and investment, but all it jumpstarted were executive bonuses and stock buybacks. A 2011 Senate report found that the 15 companies that brought back the most capital actually cut over 20,000 jobs and cut research and development spending between 2004 and 2007. Even worse were the expectations this precedent created. It turns out if you give a corporation a repatriation tax holiday, they're going to expect another, which is why it would cost $79 billion over a decade. It incentivizes firms to sit on cash overseas and wait for the next holiday.
Of course, corporations don't have to wait for the next holiday if it never ends. That's what a territorial system is -- it eliminates U.S. taxes on foreign earnings altogether. Now, Romney says that he will pay for this part of his corporate tax plan, along with a further rate cut, by putting an end to some preferences. But he doesn't say which -- any -- he would go after. Luckily for us, the Committee for a Responsible Federal Budget put together this nifty corporate tax calculator that lets you try out different corporate tax reform permutations. Let's plug in what we know about the Romney plan -- it creates a $960 billion revenue hole, it makes the research tax credit permanent, and it moves to a territorial system. Romney would have to cut roughly $67 billion in preferences to get to a 22 percent rate. Not easy, but not impossible.
The good news for Romney is that his corporate tax plan is mathematically possible. That's an improvement over the rest of his tax plan, which is decidedly not. The bad news is the math works, but it adds up to a trillion dollar hole, with half of that going to the top 1 percent. Now, the smart money is on Romney trying to Etch A Sketch this, but this is his plan.
Time to start shaking?
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Matthew O'Brien is a former senior associate editor at The Atlantic.