In the 1950s, the corporate tax rate was 52 percent. With the passage of tax reform, it now stands at 21 percent.
Just about where it should be to compete internationally, according to Mark Bloomfield L’76, WG’76, the longtime president and CEO of the American Council for Capital Formation, a business-sponsored economic policy advocacy organization with an affiliated think tank.
Bloomfield called the reduction from 35 percent “the single most important thing in the tax bill,” which also lowers individual tax rates, decreases deductions on state and local taxes, eliminates the individual mandate to buy health insurance contained in the Affordable Care Act, and increases the child tax credit.
He said lower corporate rates will spur new investment, make America more competitive in the global economy, and encourage foreign-owned businesses to relocate to the United States. In addition, Bloomfield said there are pro-growth temporary provisions that will allow companies to immediately deduct investment expenses. American businesses will be permitted to bring home current overseas profits with a minimal one-time tax and in the future without taxation, joining the rest of the world in territorial taxation.
With the new tax law, the Republican Congress has accomplished the kind of major reform that had eluded lawmakers since 1986, when President Reagan signed comprehensive legislation that significantly lowered rates, simplified the tax code and eliminated many loopholes. It also was revenue neutral, unlike the legislation that gained President Trump’s signature.
And therein lies a major sticking point for Bloomfield. The Joint Committee on Taxation and other groups have projected at least a $1 trillion deficit over the next ten years due to the tax cuts.
“The tax cuts will not pay for themselves,” Bloomfield said. “Honestly, it’s unclear how much economic growth we will have. I believe it will be more than people think.”
If economic growth doesn’t pay for itself, as Bloomfield believes, what then? House Republicans floated a cross-border tariff on imported goods to pay for a reduced corporate tax, a proposal which big-box retailers adamantly opposed. Bloomfield believes the United States will eventually have to shift from an income to consumption tax.
“My thesis is that in ’86 they tried to fix the income tax, and it began to unravel as soon as it was signed into law,” Bloomfield said. “We’re trying to do it again in ’17 but for political and economic reasons the income tax cannot be fixed. Therefore, sooner or later we must go outside the income tax to a consumption tax, not necessarily a European value added tax, to address our unsustainable deficits and respond to the many new popular tax cuts made temporary to comply with congressional budget rules.”
The income tax, he said, is broken because eliminating tax expenditures, despite Republican efforts to do so, is seemingly impossible because those provisions are so politically protected. That includes, for example, measures citizens can take to reduce their tax liability through deductions on things such as 401k retirement plans, healthcare, or home mortgages.”
The Tax Cuts and Jobs Act, Bloomfield said, moved in the direction of a consumption tax by allowing businesses to expense investment. The goal for individuals is to tax spending and reward saving, building on the IRA concept, but taxing consumption only above a certain threshold to ensure lower income people are not penalized, he said.
A consumption tax for the U.S., long championed by Democratic Sen. Ben Cardin, has also been considered by senators across the aisle, including John Thune, Rand Paul, Mike Lee, and Marco Rubio, although there have been different opinions on how to structure it.
Bipartisanship, Bloomfield said, was key to passing tax reform in 1986 — but that’s in short supply these days. And that has kept Congress, he said, from crafting a better and more durable product. However, he said, the GOP had no choice but to opt for a fast track budget procedure where only a simple majority, rather than the 60-vote requirement in the Senate, could secure a desperately needed legislative win.
Looking back, Bloomfield said, tax reform under President Reagan worked in 1986 because of an unusual political coalition in Congress. “Democrats wanted to get rid of what they thought were loopholes, and Republicans wanted lower rates,” he said. “It was a perfect deal.”
At the American Council for Capital Formation, Bloomfield has been organizing salons for years in the hope that they can serve as vehicles for fomenting policy change and bipartisanship. Since 1982, he’s been assembling four members of Congress, four journalists, and eight business people for honest, off-the-record dinner discussions. “What I pride myself on doing here is bringing people from diverse groups together,” he said.
He was proud that he recently cajoled Wisconsin political opposites, conservative Republican Sen. Ron Johnson and progressive Democrat U.S. Rep. Gwen Moore into having a conversation about economic reform.
Such miraculous meetings give Bloomfield a sliver of hope about economic policy in the future. “Who would’ve predicted Trump would become president? Between politics and the stock market, I never predict,” he said. “I move forward and hope the pieces come together.”