But, because corporate tax revenue is now about 1.6% of GDP, the direct effect of halving the tax rate would reduce revenue by about 0.8% of GDP, or $160 billion a year at the current level of output.
The US cannot afford such a large increase in the fiscal deficit. And, because few features of the corporate tax law can be changed to reduce that revenue loss, I think the corporate tax rate will be reduced to about 25%. That would still be substantially less than the current rate and in line with the OECD average.
Corporate tax rates have been declining around the world in recent decades. The US rate was previously 50%, and rates in the other OECD countries were substantially higher than the current 25% average. It is certainly possible that the reduction of the US rate will cause other developed countries to reduce their corporate tax rates to improve their relative attractiveness to internationally mobile capital.
In short, the congressional legislation that is likely in the months ahead will change the tax rules for US companies, but it will also have important effects on international capital flows. It could also have significant effects on tax rules around the world.
Martin Feldstein, professor of economics at Harvard University and president emeritus of the National Bureau of Economic Research, chaired President Ronald Reagan’s Council of Economic Advisers from 1982 to 1984. In 2006, he was appointed to President Bush's Foreign Intelligence Advisory Board, and, in 2009, was appointed to President Obama's Economic Recovery Advisory Board. Currently, he is on the board of directors of the Council on Foreign Relations, the Trilateral Commission, and the Group of 30, a non-profit, international body that seeks greater understanding of global economic issues.