The House tax bill upends the 2017 corporate tax bargain

The 2017 Tax Cuts and Jobs Act (TCJA) paired a historic tax cut for corporations with scaling back business tax breaks. In doing so, it delivered, at least in part, on the promise of comprehensive tax reform: eliminate costly tax deductions that benefit few in exchange for lower tax rates that benefit everyone to create a simpler, fairer, and more efficient system without sacrificing federal revenue. This principle was also central to Republican messaging at the time.

But with their new Big, Beautiful Bill, House Republicans have broken the 2017 corporate tax bargain: broaden the base and lower the rate. By doing so, they risk increasing the deficit with little economic return.

The TCJA helped offset the cost of a lower corporate tax rate

Before the TCJA, the U.S. had a top corporate tax rate of 35%—the highest in the Organization for Economic Cooperation and Development (OECD). In an increasingly globalized economy, a relatively high U.S. corporate tax rate discourages domestic investment in favor of shifting operations and profits to lower-tax countries.

There was broad, bipartisan consensus that the U.S. corporate tax rate needed to come down. On this dimension, the TCJA delivered—perhaps even over-delivered—by cutting the corporate tax rate by 40%. But, this change came at a steep cost, reducing federal revenues by $1.3 trillion. TCJA therefore:

• Limited interest deductibility, reducing the long-standing tax bias in favor of debt over equity and discouraging excessive corporate leverage
• Phased out research and experimental (R&E), aligning the treatment of research-costs with longer-term investment returns
• Phased out partial or full expensing of equipment investment, narrowing a tax expenditure that disproportionately favored capital-intensive firms
• Eliminated specialized deduction for domestic production, removing a complex and narrowly targeted preference that distorted firm behavior with little effect on domestic production

By broadening the corporate tax base and offsetting a substantial share of the revenue loss from the corporate rate cut, these changes reflected a meaningful shift toward a more efficient tax system.

The House bill sacrifices fiscal discipline for negligible growth

The new bill temporarily restores or extends many of these same tax breaks—this time without any offsetting increase in the corporate tax rate. It also introduces new costly provisions, including:

• Expanding interest deductibility
• Reviving full expensing for R&E
• Restoring full expensing for equipment investment
• Permanently rolling back scheduled tax increases on certain foreign income of U.S. multinationals
• Introducing a temporary deduction for domestic manufacturing

Altogether, these changes will reduce federal revenue by more than $400 billion. Yet, among these changes, only the three-year revival of equipment expensing has a track-record of increasing business investment and generating potentially economy-wide benefits—although certainly not enough benefits to “pay for itself.”

The new bill has a price tag that will add at least $3.8 trillion to the debt—all in exchange for a measly 0.03 percentage point increase in gross domestic product (GDP) according to federal scorekeepers.

Offsets are still possible

Raising the corporate tax rate even only a few percentage points could raise substantial revenue to help balance elements of the House bill.

The Congressional Budget Office estimates that a one percentage point increase in the corporate tax rate yields roughly $136 billion in tax revenue over ten years. A limited increase—for example from 21% to 25%—could raise hundreds of billions of dollars while maintaining international competitiveness. This kind of reform could preserve pro-growth goals without abandoning fiscal responsibility.

The bundle of business tax changes in the TCJA were balanced in principle. Policymakers paired rate cuts with base broadeners to help preserve revenue and reduce economic distortions while aiming to support long-term growth. By contrast, the new House bill maintains the corporate tax cut while bringing back corporate tax deductions. The benefits of that tax cut would tilt toward large multinationals and high-income households that own significant shares of corporate stock.

Deficit-financed tax cuts risk doing more harm than good by ultimately crowding out private investment and undermining the very growth they are meant to support. Notwithstanding claims from some advocates, TCJA did not pay for itself. To extend or expand corporate tax deductions to support growth, Congress could revisit the corporate tax rate and return to the principles that made the 2017 reform more than just a tax cut: simplicity, fairness, and fiscal sustainability.