Delaying the Corporate Rate Cut Won’t Hurt the Economy

by Robert VerBruggen

Betsy McCaughey (echoed by our own Deroy Murdock) suggests that Republicans should make it a priority to cut the corporate tax rate right away in 2018, instead of delaying the cut until 2019 as the Senate bill does, and pay for it by raising the child tax credit to $1,600 instead of $2,000. I believe this is unnecessary, indeed potentially counterproductive, and would create political problems as well.

The key concern is that we’ll reduce growth if we delay the corporate cut until 2019, because companies will put off economic activity until then. Believe it or not, the opposite is more likely the case.

Another provision in the Senate bill would allow companies to fully expense certain investments, such as equipment and machinery, instead of deducting depreciation over a number of years; it goes into effect right away and phases out gradually after 2022. A higher corporate rate in 2018 actually enhances the effect of this policy, giving companies a bigger reason to shield their money from taxation next year. They can deduct investments against the current 35 percent rate, and then pay the new 20 percent rate on the profits they make from those investments in future years.

That’s a huge incentive, and it’s the reason the Tax Foundation found the Senate bill (as it stood about a month ago) to be more pro-growth than the House bill: “Due to the interaction of a delayed corporate rate cut and the immediate implementation of temporary full expensing, the Senate version of the Tax Cuts and Jobs Act accelerates capital investment, generating a faster dynamic response than the House version of the plan. The current version of the House plan takes longer for these economic results to be achieved.”

Politically, Senators Marco Rubio and Mike Lee pushed quite hard for the $2,000 child credit; Rubio said it was “actually not a very negotiable number.” Going back on that would risk their and their allies’ votes, and thus the fate of the whole effort.

Further, the House’s $1,600 credit basically just makes up for the fact that both bills eliminate dependent exemptions — and thus shifts money around, creating winners and losers, rather than giving any of the bill’s $1.5 trillion price tag to parents. The Senate’s higher credit shields more families from tax hikes and ensures that parents in general get a meaningful cut.

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