Republicans Reach Tentative Tax Agreement: Raise Corporate Tax To 21%, Cut Individual Tax To 37%

One month ago, we speculated that in order to pass the GOP tax plan, Congress would end up having to raise the proposed corporate tax rate from 20% to 25%, because as it stands now, there is simply not enough sources of funding.

And while it's not at 25% yet, it's slowly getting there, because as The Hill report as part of the ongoing negotiations between the House and Senate, Republican negotiators have reached a tentative agreement to raise the corporate tax rate in their joint House-Senate tax bill from 20 to 21 percent.  The modestly higher corporate tax rate end a "furious debate" within the GOP conference, even as both conservatives inside and outside the conference, not to mention the president, have fought to keep the 20 percent rate originally approved in separate bills by the House and Senate.

And speaking of the president, it is unclear if Trump is aware that his much-trumpeted 20% corporate tax rate is about to go up by (at least) 1%.

Even with the revisions, it is premature to declare victory, as one conferee noted that there has been no formal vote for conferees to sign off on any provisions in a final bill. “We have not yet a vote on any of these policies," said Sen. Tim Scott (R-S.C.). "There’s certainly a lot of interest in what we do with the corporate rate.” 

While the centerpiece of House and Senate bills is a reduction in the corporate tax from 35% to 20%, there's been a push to hike the rate in order to pay for additional changes to the bill that might benefit more middle class families and smaller businesses.

In addition to raising the corporate rate, another key change under discussion on the tax reform bill is lowering the top rate for individuals from 39.6% to 37%, although this too is a two-edged sword, as lowering the top income rate for individuals might fuel criticism from Democrats that they bill gives too much tax relief to high-income earners. However, it would also solve several problems, such as providing more help to the owners of pass-through businesses and reducing the disparity between those entities and corporations. It could also help people living in high-tax states deal with the loss of higher deductions for local, state and property taxes. The tax-cut bill previously approved by the House keeps the top rate of 39.6%, while the Senate-passed bill would reduce it to 38.5%.

“We are very close to having people on the same page,” said Scott, a member of the Senate-House conference committee.


Scott said “there is discussion” about setting the top individual rate at 37 percent, noting “it helps business and it’s also an additive as it relates to SALT,” referring to proposals to limit the deductibility of state and local taxes.


But the idea is not sitting well with all Senate Republicans. “This is not the Senate bill,” said one Republican senator who confirmed the discussion of the 37 percent rate and expressed concern. 

On the issue of SALT, the Hill says that there’s also strong support for giving residents in New York, California and other high-tax states a choice about whether to deduct their state and local property or income taxes, up to a $10,000 cap.

Giving taxpayers greater flexibility to deduct the state and local taxes (SALT) is an idea promoted by Majority Leader Kevin McCarthy (R-Calif.), who is No. 2 in GOP leadership.


Sen. Susan Collins (R-Maine), a pivotal swing vote, has advocated for setting the corporate rate at 21 percent instead of 20 percent. She says business leaders have told her it would not affect investment significantly. Collins, who supports keeping the top individual tax rate at 39.6 percent for families earning over $1 million, declined to comment on the prospect of lowering it to 37 percent.

Earlier in the day, Senate Republicans signaled that members of the House-Senate conference committee are on a edge of locking down a final deal as soon as Tuesday, in the process sending stocks to new all time highs. 

Senate Majority Whip John Cornyn (R-Texas) told reporters it was possible negotiators could reach a verbal commitment as early as Tuesday. “I think it could, and I hope it is,” said Cornyn, one of the Senate negotiators.


Sen. John Thune (R-S.D.) said it was "possible" negotiators could reach an agreement on Tuesday, but noted they are still working.  "It would be nice to be done today. That might be a little bit ambitious but probably possible," he said.

Of course, the fact that the accelerated conclusion would mean billions in lost net income in the form of the difference between 20% and 21% effective tax rate, was not lost on stocks which then closed near the lows, while the US-heavy Russell turned red. And for those who say the difference between 20 and 21% is negligible, keep in mind that the effective tax rate of US corporations is already only 27%. Which means that every 1% increment is roughly equivalent to a 14% change in how much more, or less, effective taxes US corporations will end up paying.