In recent months, Republicans in the federal government and in Congress have been considering tax reform ideas. One issue that lawmakers are considering is the difference between temporary and permanent changes in tax policy. While most would prefer to make permanent policy changes, there are procedural limits in the U.S. Senate on permanent policy changes that increase the budget deficit.[1]
Because of these procedural limitations, some lawmakers have taken to considering the merits of a temporary tax cut plan as well, which would sunset after ten years, much like the tax cuts enacted by President George W. Bush in 2001 and 2003.
There are many trade-offs involved in this kind of decision. This report will cover one of them: a question posed by Office of Management and Budget (OMB) Director Mick Mulvaney to The Wall Street Journal.[2]
“If it’s a temporary proposal, will businesses and even individuals change their behavior in order to get you the economic growth?” asked White House budget chief Mick Mulvaney in an interview last week. “That’s what we’re going through right now.”
Mulvaney’s question—whether an individual or firm would change behavior in response to a tax policy provision, knowing that the provision was only temporary—is relevant to all kinds of tax policy; however, this question is most incisive when it concerns cuts to the corporate income tax rate, as the administration has proposed.
This report will show that, by the economic framework typically used to evaluate business taxes and investment decisions, a temporary cut to the corporate income tax rate is substantially less effective than a permanent one.
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