Senate procedural limits on legislation that will increase the budget deficit are hampering the potential for permanent tax rate cuts. But as Alan Cole writes at the Tax Foundation, temporary cuts won’t help the economy as much as permanent cuts. Companies dealing with temporary cuts will reduce their investment as the end of the lower-rate period draws near. Cole writes:
In recent months, Republicans in the federal government and in Congress have been considering tax reform ideas. One issue that lawmakers are considering is the difference between temporary and permanent changes in tax policy. While most would prefer to make permanent policy changes, there are procedural limits in the U.S. Senate on permanent policy changes that increase the budget deficit.
Because of these procedural limitations, some lawmakers have taken to considering the merits of a temporary tax cut plan as well, which would sunset after ten years, much like the tax cuts enacted by President George W. Bush in 2001 and 2003.
- A temporary cut to the corporate income tax rate is substantially less effective at generating economic growth than a permanent cut.
- A ten-year reduction in the U.S. corporate income tax rate to 15 percent would boost investment and growth over the first seven years of the policy, but then reduce growth.
- The specter of a future tax increase makes investment under a temporary low rate less enticing, especially for long-lived assets.
- A temporary corporate income tax cut is most likely to result in higher payouts to shareholders of corporations; a permanent corporate income tax cut has a much better chance to result in increased wages as well.
Read more in the full report.