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Temporary Provisions in the Corporate Tax Bill Mask Its Likely Long-Term Impact on the Defict

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Abstract:

The conference committee chaired by House Ways and Means Chair Bill Thomas completed work on the corporate tax bill on October 6, and the House and Senate are expected to vote on the measure before adjourning this week. The bill would take the positive step of repealing an export subsidy that has been declared illegal by the World Trade Organization and closing a number of corporate tax shelters. Unfortunately, the bill uses the revenues raised by these provisions to finance a raft of new corporate tax cuts. Many are narrowly focused, special-interest tax breaks that offer no benefit to the economy as a whole. These tax cuts only serve to erode the corporate tax base at a time when corporate tax revenues have fallen to historically low levels and evidence of corporations engaging in tax-avoidance schemes is abundant.

The bill misses an important opportunity to make progress in addressing the nation’s fiscal problems by dedicating the revenues raised by repealing the export subsidy and closing loopholes to deficit reduction. In fact, despite an official cost estimate that shows the bill to be deficit neutral, the measure is likely to lead to higher deficits in the future. The bill includes a number of temporary tax cuts, many of which are candidates for inclusion in the growing list of “extenders” — those temporary tax cuts that are routinely extended. If these new tax breaks are extended in coming years without being paid for — a likely scenario in the absence of pay-as-you-go rules that require the cost of such tax to cuts be offset — the result will be higher deficits.