After GOP lawmakers and the Trump administration slashed the corporate income tax rate from 35 percent to 21 percent two years ago, corporate tax revenue as a share of gross domestic product is lower in the United States than any of 30 developed countries — with the exception of Latvia.
That's the conclusion of Jason Furman, a Harvard University economics professor who testified before the House Ways and Means Committee Tuesday. “Corporate revenue collections are very low” both historically and compared to other advanced economies, said Furman, who served as chairman of the Council of Economic Advisers under President Barack Obama.
While there are estimates that corporate tax collections will grow slightly as a percentage of GDP in coming years, that likelihood will evaporate if business provisions in the 2017 tax law are made permanent, Furman added, chiefly those allowing more generous equipment expensing.
Ways and Means Democrats held the hearing to highlight unexpectedly low corporate tax collections following the big tax cut, which took effect in 2018. Republicans countered that making U.S. corporate tax rates internationally competitive ended the relocations of U.S. corporations overseas, and has been key to an economic boom that President Donald Trump has called the greatest in American history.
At the time the tax overhaul was being considered, the Joint Committee on Taxation estimated that the corporate tax rate cut would cost $1.35 trillion over 10 years. But tax collections following the cut suggest the hit was even bigger, as corporate tax collections plummeted 31 percent to $205 billion in 2018, $38 billion below estimates. The $230 billion collected in 2019 was $46 billion below earlier JCT predictions.
Raising the corporate rate is key to many of the new spending proposals put forth by Democratic presidential hopefuls who have plans ranging from a small bump up to 25 percent or even raising it all the way back to 35 percent.
Rep. Bill Pascrell Jr., D-N.J., said he expects criticism to intensify during this election year. During the hearing, Pascrell noted that corporate income taxes are now “the least amount as a percentage of GDP ever.”
A look at Office of Management and Budget historical tables shows that in 2018 federal revenues as a percentage of GDP dropped to 1.0 percent down from 1.5 percent the year before. The rate had previously fallen as low as 1.0 percent in 2009 and 1983 following recessions and only fell lower during the Great Recession.
Put a different way, corporate taxes represented 6 percent of total government receipts in 2018, down from 9 percent in 2017 and 15 percent in 2006.
Series of hearings
Ways and Means Chairman Richard E. Neal said his interest in the topic stems from the historic impact that federal tax collections as a percent of GDP have on the economy and deficits. In 2019, federal revenues were 16.3 percent of GDP down from 17.6 percent in 2016.
“We’re going to be doing a series of hearings on the  tax bill,” Neal, D-Mass., told reporters after the hearing. “People frequently pay a lot of attention to the spending side, and we’re saying that there’s also a revenue question here.”
Neal pointed out that tax collections were 20 percent of GDP as President Bill Clinton left office and the federal budget was in surplus, rather than deficit. The fiscal 2000 figure was the highest since 1944, when tax collections ramped up to pay for the war effort. Clinton also benefited from a booming economy fueled by capital gains realizations, as investors reaped stock market profits before the dot-com bubble burst.
The administration’s fiscal 2021 budget projects that federal revenues would grow faster than the economy and hit 17.6 percent by 2030.
In an analysis released Monday before the hearing, JCT’s explanation of the unexpectedly low corporate tax collections centered on companies being very quick to react to the GOP tax law. Even though the law passed in December 2017, companies were able to push recognition of more of their expenses into 2017. That represented a big tax benefit since it cut income on which companies would have paid a 35 percent rate, rather than the lower 21 percent rate in 2018.
The ability to write off more expenses, repatriate earnings from overseas subsidiaries at a lower rate, and an incentive for companies to bring forward past net operating losses to offset current taxes also helped spur lower-than-expected corporate tax bills.
“It still remains early” to judge the impact of the law on corporate tax collections, said Douglas Holtz-Eakin, president of the American Action Forum. Holtz-Eakin noted that corporate tax collections were falling before the 2017 law went into effect, which he attributed to falling corporate profits.
Holtz-Eakin, a former Congressional Budget Office director, noted that American companies were regularly relocating their headquarters overseas to avoid U.S. tax treatment of corporations, which he says is now much more competitive and has led to an end of "inversions" by U.S. companies. “I think the early evidence is quite promising,” he said.
Holtz-Eakin added that although going from a 35 percent tax rate to 21 percent was a sharp drop, U.S. trading partners and overseas rivals are continuing to drop their own corporate rates to remain competitive. "It got us in the middle of the pack and the pack's still heading south," he said.