House Bill Would Slash Business Taxes and Undermine Efforts To Stem Profit Shifting

With the ink barely dry on a measure to raise the federal debt limit and avert default, the Republican majority on the House Ways and Means Committee has advanced a measure that would further enlarge the primary cause of the nation’s increasing debt ratio: tax cuts.

H.R. 3938, authored by Ways and Means Committee Chairman Jason Smith (R-MO), would reverse three revenue-raising provisions contained in the 2017 Tax Cuts and Jobs Act (TCJA). The TCJA gave massive tax cuts to corporations by slashing the corporate tax rate from 35 percent to 21 percent and made other changes that favored the wealthy. Notably, in order to enact the TCJA through Congress’ budget reconciliation process, the authors of the bill needed to design it in a way that limited its official cost, as estimated by congressional scorekeepers, to $1.5 trillion over 10 years. To do that, they included various provisions that would raise revenue, offsetting some of the cost of the tax cuts. But unlike the corporate rate cut, which went into effect immediately, implementation of these revenue-raising provisions was delayed for several years.

Now, as these provisions begin to take effect, Republican members of the Ways and Means Committee are fighting hard to have their proverbial cake—the corporate rate cut—and eat it too by approving a bill that would delay three of the modest revenue increases that helped to partially pay for it. Taken together, these three provisions offset approximately 4.25 percentage points of the TCJA’s 14-percentage point reduction in the corporate rate over the initial 2018–2027 scoring window.

The measure, which passed out of the Ways and Means Committee on a party-line vote, would also repeal a portion of the Inflation Reduction Act’s landmark initiative to address climate change—a set of tax credits designed to accelerate the transition to a clean energy economy. While these changes are designed to offset the measure’s tax cuts, the revenues raised fall far short during the three-year extension of the corporate tax breaks.

Corporate taxes have fallen as a share of the economy since 2017

In addition to slashing the corporate tax rate, the TCJA shifted the United States to a territorial system of taxing the income of multinational corporations, which exempts certain offshore income from tax, and made other changes that, taken as a whole, significantly reduced the taxes paid by profitable corporations. Unlike the changes to personal income taxes, nearly all the corporate law changes were made permanent, signaling their importance to the drafters of the law. As a result of these and previous changes, corporate tax revenues as a share of gross domestic product (GDP) are now less than half of what they were during the 1960s and 1970s. To date, there is little evidence that the corporate tax changes have boosted investment or employment, as promised by the law’s proponents, or that the changes aimed at stemming offshore profit shifting have managed to do so.

Notably, the recent push for corporate tax cuts comes at a time when after-tax profits are at historically high levels as a share of the economy. Despite strong profits over the past decade, U.S. corporate taxes remain far below those of most other large economies: The United States ranked 32nd among the 38 Organization for Economic Cooperation and Development (OECD) countries with respect to corporate tax revenues as a share of GDP in 2020—the most recent year for which complete data are available.

Lifting the limits on interest deductions would largely benefit private equity

To partially offset the cost of the corporate tax rate cut, the TCJA imposed a limit on the amount of interest certain large businesses could claim beginning in 2022, a change that primarily affected companies with large amounts of debt. The limit on interest deductions was designed to reduce the tax code’s bias in favor debt and to discourage overleverage. That’s because interest payments on debt used to finance new investment can be deducted from revenue to determine income subject to tax. In contrast, dividends paid to investors on stock sold to finance new investment are not a deductible expense. The TCJA’s interest deduction limit was estimated to raise $253.4 billion from fiscal year 2018 through fiscal year 2027. The Ways and Means-backed bill would lift the limits on interest deductions through 2025.

The use of debt-financed investment is at the core of the private equity business model, and private equity firms are noted for purchasing financially healthy firms using high levels of debt, saddling the purchased firms with large interest payments and increasing the risk of bankruptcy. By limiting the amount of deductible interest, the 2017 law change discouraged the use of excessive debt, while the current proposal would remove that disincentive.

Lastly, Congress should tighten, not loosen, limits on interest deductions if it chooses to extend bonus depreciation, as discussed below. Allowing more generous interest deductions in combination with immediate expensing of investment costs provides, in essence, a double tax benefit by allowing a deduction for the full cost of an asset and a deduction for the interest on debt used to purchase that asset.

Bonus depreciation would undermine the corporate minimum tax

The TCJA also allowed companies to immediately deduct the full cost of new equipment and machinery, rather than depreciate those costs over time, from 2018 through 2022, with the amount of the deduction phased down through 2026 and a return to pre-TCJA law in 2027.

Even before the TCJA’s changes, tax laws allowed businesses to deduct the cost of equipment over a shorter period than its useful life. Accelerated or “bonus” depreciation is one of the major reasons why many large corporations pay so little corporate tax. The ability to deduct the entire cost of investments in the first year—also known as 100 percent bonus depreciation or “expensing”—is the most generous form of accelerated depreciation. The Ways and Means-backed bill would allow full expensing—bonus depreciation—for most property placed in service from 2023 through 2025.

A 2022 analysis by the Institute on Taxation and Economic Policy (ITEP) shows that 23 large, profitable corporations alone saved nearly $50 billion from this tax break during the TCJA’s first four years. Moreover, leaders of efforts to secure expensing include large, profitable firms that have exploited special treatment to pay a fraction of the 21 percent corporate rate. Northrop Grumman, for example, paid an average of 11.5 percent of its profits in corporate taxes from 2019 to 2021, while Amazon paid just 7.9 percent during that span. The Joint Committee on Taxation (JCT) estimates that the initial three-year extension of bonus depreciation would cost $68.2 billion. However, should this provision be further extended—as proponents have advocated—through 2033, the Congressional Budget Office estimates that it would cost $325 billion over the 2024–33 period.

While prior versions of the new corporate minimum tax (CMT) would have limited the ability of large, very profitable corporations to use accelerated depreciation to offset the new minimum tax, the version ultimately included in the Inflation Reduction Act allows accelerated depreciation deductions. An extension of 100 percent bonus depreciation would both increase the unfunded cost of the TCJA and undermine the purpose of the new CMT for many of the largest and most profitable corporations.

R&D is already highly subsidized

Another of the TCJA’s revenue raisers, which took effect starting in 2022, removed a special tax break by requiring corporations to amortize the cost of research and experimental (R&E) expenditures—also referred to as “research and development,” or R&D—over no less than five years, rather than deducting or expensing those costs all at once. The Joint Committee on Taxation (JCT) forecast that the shift from upfront expensing to amortization would raise nearly $120 billion from FY 2022–2027. Yet the Ways and Means-backed bill would extend the ability to expense R&E from 2022 through 2025.

As explained in a previous Center for American Progress article:

The federal government has a long history of support for research and development, both through direct expenditures and the tax code. In particular, federal support for basic and applied research enables lifesaving breakthroughs in medicine, while federal investment through the Defense Advanced Research Projects Agency (DARPA) and other programs has led to foundational advancements in computing and related technologies.

Recent initiatives, including the CHIPS and Science Act, will invest $52.7 billion to support next-generation semiconductor research, manufacturing, and workforce development. Likewise, the landmark Inflation Reduction Act provides more than $70 billion to promote research, manufacturing, and adoption of products that will transform energy markets and help the United States meet its carbon reduction goals. While direct federal support—through grants and other investments—is most effective at promoting the basic research that drives overall innovation, tax incentives often subsidize the translation of research into marketable products in ways that benefit individual firms but do not have broader spillover benefits.

Businesses invest in research and development to boost productivity and develop new products. The ability to immediately write off or expense investments in R&D is considered a special tax break because standard accounting and income tax principles hold that investments should be deducted over their useful life. By its basic nature, R&D is a long-term investment that is intended to generate profits over time as products become commercially viable and go to market.

The tax code does provide other preferential treatment for R&D—most notably, the research and development tax credit, which provided a $23 billion subsidy for “qualified” business research costs in 2022.

Extension of the three corporate tax breaks would overwhelmingly benefit the wealthy and foreign investors

An analysis by the Institute for Taxation and Economic Policy (ITEP) finds that the extension of the three corporate tax breaks, along with a fourth provision in a companion measure, would overwhelmingly benefit the highest-income Americans. The top 1 percent of households would receive 58 percent of the total tax break going to U.S. taxpayers—an average tax cut of $16,550—while the bottom 20 percent of households would receive 1 percent of the change and an average tax cut of just $10. The ITEP analysis also finds that a full third of the total cost of the tax cuts would benefit foreign investors that own stock in U.S. corporations.

Proposed measure would reignite the global race to the bottom

A separate bill introduced by Ways and Means Committee Chairman Smith would undermine the global minimum tax established through multilateral negotiations hosted by the OECD and supported by nearly 140 nations. Specifically, the proposed change would retaliate against individuals and companies from countries that implement the OECD agreement by imposing a higher tax on their investment within the United States.

The OECD proposal would address long-standing flaws in the corporate tax code that reduce the share of taxes paid by profitable businesses and create incentives for shifting U.S. jobs and investment offshore. The TCJA failed to fix these flaws: While the lower statutory corporate rate reduced the incentive to profit shift, the move toward a territorial system that excludes from tax certain income of U.S. multinationals, coupled with the structure of the TCJA’s minimum tax, created an offsetting incentive to shift profits outside the United States. By penalizing countries that implement the OECD standard, the Smith proposal attempts to use the economic power of the United States to block this unprecedented attempt to establish a global minimum tax backed up by a mechanism designed to ensure that countries impose a true minimum tax and to eliminate the incentive to profit shift.

Conclusion

Congress should reverse, not expand, massive tax cuts that have failed to deliver promised economic benefits and that have put upward pressure on the federal debt. The current measure stands in stark contrast to the recent debt limit agreement: The revenues lost from the Ways and Means Committee measure—slightly more than $400 billion through 2027—nearly equal the savings from the spending caps imposed on discretionary funding in the recent debt limit agreement. Congress should not enact tax cuts while slashing spending for investments—such as child care, medical research, and education—that are fundamental to a healthy economy.