The most significant changes from the 2018 tax bill under President Trump impacted corporations. The significant benefits to corporations included the following: a reduction in the statutory corporate tax rate from 35% to 21%, 2) capital spending (spending on property, plant, and equipment) could be immediately expensed rather than depreciated, and 3) the taxation of repatriated foreign income (foreign income brought back to the U.S.) was significantly lowered. In 2017, corporations were generally taxed at a 35% rate on foreign income, but only if they sent the income back to the U.S.
Here is what those changes mean. The statutory tax rate is the rate that corporations pay on taxable income. Corporations also get deductions and credits, so not all income is taxable income. However, the reduction from 35% to 21% puts the rate at its lowest level since the 1930s and creates significant tax advantages for corporations. Prior to 2018, there was a graduated corporate tax structure that had a 35% top tax rate since 1993. That rate was significantly lowered due to the Tax Reform Act of 1986 passed under President Reagan, with the rate lowered from 46% to 34%; the rate was increased to 35% under President Clinton. Unlike the individual tax cuts, the corporate tax cut is permanent (no ending date). The expensing of capital spending is another benefit. Rather than depreciating (allocating) the cost of property, plant, and equipment over a certain number of years as required previously, companies could expense (take a full deduction for) the entire amount beginning in 2018. In other words, an immediate tax benefit for the full amount spent. The expensing of capital spending is allowed through 2022. Finally, the reduced taxation on foreign income is a major benefit for companies wishing to send foreign income back to the U.S.
Under both President Bush and President Obama, the statutory corporate tax rate was 35% and capital spending was depreciated rather than expensed. Lowering the corporate tax rate from 35% to 28% (25% for manufacturers) and reducing the tax rate on repatriated foreign income was actually proposed by President Obama, but those proposals both failed to get passed by Congress. Taxes on repatriated foreign income were significantly but only temporarily reduced under President Bush, in 2004.
For a history of corporate tax rates, here is a spreadsheet history from the IRS: Historical Table 24 – Internal Revenue Service
In summary, the corporate tax changes were significant under the new tax law implemented in 2018. The corporate tax rate was reduced from 35% to 21%, expensing of capital spending allowed, and a significant reduction on the taxation of foreign income brought back to the U.S. Not all these ideas were new. Previously President Obama proposed (to a lesser degree) a reduction in the corporate tax rate and lowering taxes on repatriated foreign income; however, these proposals were rejected by Congress.
Taxes – everybody’s favorite subject. Hopefully this blog provided some insight as to how the system works, and what changed under Presidents Bush, Obama, and Trump. And yes, taxes are very important. Not only because they affect how much money you get to keep, but the implications on government spending, how the government funds that spending, and how the economy is affected, are significant. That’s what we’ll tackle in our next blog.
CBEI Blog Series: Income Taxes – Bush vs. Obama vs. Trump
Part 1: Intro
Part 2: Federal Individual Income Tax Overview, How it Works
Part 3: President Obama vs. President Bush
Part 4: President Trump vs. President Obama
Part 5: Corporate Incomes – Briefly but Importantly
Kevin Bahr is a professor emeritus of finance and chief analyst of the Center for Business and Economic Insight in the Sentry School of Business and Economics at the University of Wisconsin-Stevens Point.