Corporate tax receipts are near a 75-year low, Jim Tankersley of The New York Times reports, and revenues are dropping at a pace normally seen only during recessions. In the first six months of 2018, collections fell by $50 billion compared to the same period a year ago, a drop of roughly 30 percent.
The reduction in the top corporate tax rate from 35 percent to 21 percent is the obvious cause, but the magnitude of the shortfall is larger than expected. Corporate tax revenues are coming in 20 percent below the projections made by the Congressional Budget Office, Tankersley says, and 10 percent below the estimates from the Penn Wharton Budget Model.
Largely as a result, the annual deficit could hit $1 trillion as soon as next year and will remain above that level for the foreseeable future.
Most unusually, this happening at a time when the economy appears to be picking up steam and headed for what could be the longest expansion in history. Corporate profits are at a record high and the tax law is forcing companies to repatriate profits held overseas, but that surge in corporate cash flow hasn’t been big enough to overcome the negative revenue effects of the tax cuts. “If we hadn’t changed our tax system, you would be expecting rising revenues,” said Reed College economist Kimberly A. Clausing.
Several features in the new tax law contribute to the revenue shortfall.
- The repatriation rules allow companies to spread out their tax payments over eight years, even if they pay out all of the funds to shareholders at once.
- Additionally, the rules that allow new investments to be written off immediately may be having a more powerful effect than expected, creating a both a surge in investment and a corresponding increase in tax write-offs. If that’s the case, “it means the government will lose more revenue than we all originally thought, especially in the short run,” the Tax Foundation’s Kyle Pomerleau told the Times.
- Finally, the new tax rules for multinationals may create more shifting of profits around the globe than expected, in ways that reduce corporate tax bills and lower government revenues.