Tax Reform Error #2: Phasing-in Lower Tax Rates

Alan Reynolds Since 1981, Republican legislators have shown a strong penchant for phasing-in tax rate reductions over several years.  That tradition is maintained in Ways and Means Committee Chair Dave Camp’s proposed 979-page “simplification” of the U.S. tax system.  The Camp draft retains a very high top tax rate of 38.8 percent on businesses that file under the individual income tax as partnerships, proprietorships, LLCs or Subchapter S corporations. For those choosing to file as C-corporations, by contrast, the Camp proposal would gradually reduce the corporate tax rate by two percentage points a year over five years, eventually reducing it from 35 to 25 percent.  The trouble with phasing-in lower tax rates is that it creates an incentive to postpone efforts and investments until later, when tax rates will be lower.  Reducing the corporate tax rate by two percentage points a year would create an incentive to repeatedly delay reported profits, year after year, holding back the economy and tax receipts.  Sensible tax planners would write-off expenses soon as possible, including interest expenses, but defer investment until future years when the tax rate would be reduced on any resulting added earnings.   Meanwhile, the widening gap between corporate and noncorporate tax rates (a difference of 13.8 percentage points after five years) would encourage many small businesses, farms and professionals to set up C-corporations to shelter re...
Source: Cato-at-liberty - Category: Health Medicine and Bioethics Commentators Authors: Source Type: blogs