A Temporary Corporate Tax Cut Won't Help Much

Senator Orrin Hatch, Chairman of the Senate Finance Committee. Photo by Gage Skidmore

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.

Key Findings

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.

E.J. Smith - Your Survival Guy

E.J. Smith is Founder of YourSurvivalGuy.com, Managing Director at Richard C. Young & Co., Ltd., a Managing Editor of Richardcyoung.com, and Editor-in-Chief of Youngresearch.com. His focus at all times is on preparing clients and readers for “Times Like These.” E.J. graduated from Babson College in Wellesley, Massachusetts, with a B.S. in finance and investments. In 1995, E.J. began his investment career at Fidelity Investments in Boston before joining Richard C. Young & Co., Ltd. in 1998. E.J. has trained at Sig Sauer Academy in Epping, NH. His first drum set was a 5-piece Slingerland with Zildjians. He grew-up worshiping Neil Peart (RIP) of the band Rush, and loves the song Tom Sawyer—the name of his family’s boat, a Grady-White Canyon 306. He grew up in Mattapoisett, MA, an idyllic small town on the water near Cape Cod. He spends time in Newport, RI and Bartlett, NH—both as far away from Wall Street as one could mentally get. The Newport office is on a quiet, tree lined street not far from the harbor and the log cabin in Bartlett, NH, the “Live Free or Die” state, sits on the edge of the White Mountain National Forest. He enjoys spending time in Key West and Paris. Please get in touch with E.J. at ejsmith@yoursurvivalguy.com To sign up for my free monthly Survive & Thrive letter, click here.