Congress

Corporate rate increase could hinder economic growth, CBO director says

Hall said raising the tax would likely reduce business investment

Keith Hall testified before the House Budget Committee on Tuesday. (Tom Williams/CQ Roll Call)

Congressional Budget Office Director Keith Hall said raising the corporate income tax rate as many Democrats want to do could slow down economic growth and wage increases.

He also said during a House Budget Committee hearing that it’s not clear that raising the tax above the current 21 percent rate would produce deficit savings.

“We might take a hit on [gross domestic product], we might take a hit actually on wage growth a little bit,” Hall said, responding to a question from Steve Womack of Arkansas, ranking Republican on the committee. Womack had asked what would happen if the tax were raised from 21 percent to 28 percent, as Budget Chairman John Yarmuth has suggested.

Hall said raising the tax would likely reduce business investment.

Yarmuth, D-Ky., is working on a fiscal 2020 budget resolution expected to envision raising the tax rate at least part way up to the 35 percent level where it was before it was cut under the 2017 tax overhaul. He told CQ earlier this month that he'd target a range of between 25 percent and 28 percent, though any actual implementing legislation would have to be drafted by the Ways and Means Committee.

The Kentucky Democrat followed up with a question to Hall about whether increasing the corporate tax rate would “improve the deficit situation,” since the tax cut as a whole is increasing the deficit.

“We’d have to look at that,” Hall said.

The CBO projects the tax cuts will increase the size of the economy over a 10-year period, at the cost of increasing deficits by $1.9 trillion over a decade. The agency estimates that economic growth generated by the tax cut will offset about 30 percent of its cost through increased revenue.

Any tax increase passed by House Democrats faces long odds of winning approval in the GOP controlled Senate.

New Direction

In opening remarks, Yarmuth laid out a new direction for the committee, saying that meeting the challenge of rising deficits will require more tax revenue, reducing growth in health care costs and improving the “efficiency” of federal spending without hurting retired people or struggling families.

Yarmuth said the committee will “help shine a bright spotlight on the reality of the situation we face . . . fully vet the choices we have and then set the stage to make the most responsible decisions as a Congress.”

In a report released Monday, the CBO projected deficits will hit $1 trillion in fiscal 2022 and continue to rise from there.

Yarmuth blamed rising deficits on President Donald Trump and “so-called fiscal conservatives” who he said, “chose to squander our nation’s wealth and solvency, to exacerbate record income inequality, to take resources from those in need so they could bolster the already wealthy with reckless tax cuts for millionaires and multinational corporations.”

Womack countered that growing mandatory spending is the main cause of the imbalance between spending and revenue and he questioned whether Democrats have a plan to reduce the deficit. Womack said policy initiatives supported by many Democrats such as Medicare-for-all and “free college” would exacerbate the nation’s fiscal problems.

Ro Khanna, D-Calif., asked Hall if it’s correct that if it were not for tax cuts pushed by former President George W. Bush and Trump and fighting wars in Afghanistan and Iraq, that the nation would still have the budget surpluses that occurred when Bill Clinton was president. The federal government ran budget surpluses in fiscal 1998 through 2001 before a recession pushed tax revenue down.

“The answer I think is no,” Hall said. Hall said during the period when Clinton was president the nation had unexpectedly strong productivity growth, and the labor force was growing more quickly because of women joining the labor force and baby boomers being in prime working ages, which brought in revenue and helped balance the budget.

“Neither of those things we’re projecting going forward,” he said.

David E. Price, D-N.C., referred to several congressional budget deals during the 1990s and asked Hall what another comprehensive budget agreement or “grand bargain” should include.

Hall said he couldn’t recommend specific policy changes, but he said “the debt problem now is really large” compared to the 1990s. In 1999, for example, debt held by the public stood at $3.6 trillion. CBO estimates debt held by the public at the end of the current fiscal year will be $16.6 trillion. “The debt’s at a high level so you need something big to change,” Hall said.

Similar to past CBO directors, Hall said Congress could reduce deficits and the debt through spending cuts or tax increases alone or a combination of the two.

Get breaking news alerts and more from Roll Call on your iPhone or your Android.