THE BRILL PLAN

Alex Brill, an economist with the American Enterprise Institute in Washington DC, recently released a new tax reform plan. The stated objectives of his six-part plan are to lessen the harmful distortions of the current tax system while promoting economic growth. The first item on his plan is:

1. Cut the U.S. statutory corporate tax rate from 35% down to 25%.

At 35 percent, the US federal corporate tax rate is second highest among industrialized countries and more than ten points above the average. The plan would phase the rate down to 25 percent over the next decade. A credible phase-in of a corporate rate cut is more economically efficient than an immediate cut because a phase-in reduces the windfall benefit to investments that have already been made while offering incentives for new investment.

This significant corporate tax rate reduction would also permit the elimination of Section 199 of the tax code, which effectively provides a preferential 32 percent rate for “qualified domestic production activities” (primarily manufacturing) income. Once the corporate rate is phased down to 32 percent, the plan would repeal Section 199, eliminating both its inefficient preference for manufacturing over other sectors and the complexity of defining and measuring the income eligible for the special rate.

The lower corporate rate would offer numerous benefits. For example, it would mitigate the tax code’s impediments to global competitiveness by ensuring our corporate rate is similar to those of other nations. Because much of the burden of corporate taxation falls on workers through lower wages and fewer jobs, the corporate tax rate cut would boost the weak US labor market.During the phase-down period, it would also modestly encourage firms to make capital investments more quickly so that they could deduct the depreciation of those investments while the corporate rate is relatively high and realize the income from those investments when the rate is lower.

This proposal is consistent with recent bipartisan tax reform recommendations. The Simpson-Bowles Fiscal Commission report proposed lowering the corporate tax rate to between 23 and 29 percent, the Rivlin-Domenici Commission proposed a 27 percent rate, and Ways and Means Committee Chairman Dave Camp recently proposed reducing the rate to 25 percent.

You can read his report here.