The Trump administration's pledge to slash the corporate tax rate faces an immovable obstacle: how to pay for the lost revenue that would come from the cuts.
On the campaign trail, President Trump vowed to cut the corporate rate from 35% to 15%, a plan central to the administration's larger pro-growth economic agenda.
Details of a road map for tax reform have to yet to emerge from the White House. But Gary Cohn, Trump's director of the National Economic Council, recently told CNBC that the administration is committed to advancing tax reform under the budget reconciliation process, which will require any changes to the tax code to be deficit-neutral over the next 10 years.
"We are actively working on a variety of different tax alternatives," Cohn said, adding that the Trump administration will present a tax plan after health care reform is complete.
"We're exploring all opportunities in taxes," repeated Cohn.
Proposal to tax earnings in retirement plans
That pledge has some retirement policy experts predicting that the preferential tax treatment of employer-sponsored retirement plans will be considered as a way to offset revenue losses to cutting the corporate tax rate.
Last year, a proposal to lower the corporate tax rate to 15% was advanced by the non-partisan Tax Policy Center, a joint program led by the Urban Institute and the Brookings Institution.
The extensive plan includes a new 15% tax on the annual gains in 401(k) plans and other tax-preferred retirement accounts, which the proposal's two authors—including one from the conservative leaning American Enterprise Institute—say would raise $48 billion in new revenues in 2018 and $60 billion in 2025.
Under existing law, capital gains and dividend earning on investments in retirement plans are not taxed until the savings are withdrawn, when they are taxed as regular income in most plans.
Letting the gains in retirement accounts go untaxed as the accounts grow contributes to the so-called forgone tax revenue in retirement plans.
Along with the tax breaks on plan participants' income deferrals, excluding annual earnings from taxes accounted for nearly $159 billion in lost tax revenue in 2015, and more than $1 trillion in estimated foregone revenue between 2015 and 2019, according to the non-partisan Joint Committee on Taxation.
According to the Tax Policy Center's proposal, the idea of taxing gains in retirement plans to support a 15% corporate tax rate is not designed "to expand or scale back tax benefits" for investors in retirement plans.
The objective is to keep the overall tax burden on retirement savers level with current law, according to the proposal.
In theory, it would limit the new net tax benefits savers would receive from a substantially lower corporate tax rate. At 15%, the U.S. would transform from the country with the highest corporate tax rate among the 35-member Organization for Economic Cooperation and Development, to a country with one of the lowest rates. "The value of corporate shares would likely rise in the short run," the proposal says.
