Cutting Corporate Tax Rates in 2018 or 2019: It Matters
The important effect of incentives on allocation over time.
One of the differences between the House and Senate versions of the tax cut is whether the corporate tax rate falls in 2018 (House) or 2019 (Senate.) It might look as though it’s no big deal. It might well be a big deal, partly economically and, deriving from the economics, partly politically.
You’re someone deciding whether to start a new business that you think will make money the first year. Under the House version, the corporate tax rate falls to 20 percent in 2018. So if that provision is kept, you know you’ll pay the corporate tax rate of 20 percent on your profits. But if the Senate version is kept, you’ll pay, the first year, at 35 percent.
Hmmm. What to do if the Senate version is kept? Wait to invest until 2019. So, to whatever extent the tax cut does increase economic growth, some of that growth will wait until 2019. Why does that matter politically? The midterm elections.