President Donald Trump is leaning toward preserving atrillion-dollar tax break for corporate borrowers — a move thateconomists say could jeopardize his goal of robust economicgrowth.

The administration's “preference” is to keep so-called interestdeductibility, which allows companies to subtract interest paymentsfrom taxable income, Treasury Secretary Steven Mnuchin told TheEconomist in a joint interview with Trump. Their remarks, publishedThursday, reveal a new fissure between Trump's vision for taxpolicy and that offered by House Speaker Paul Ryan.

Ryan has called for eliminating interest deductibility, a movethat would raise an estimated $1 trillion over 10 years. Gainingthat revenue would help pay for rate cuts and other tax measuresthat Ryan and other GOP leaders want, including a provision thatwould allow corporations to immediately write off the cost of theircapital spending.

Economists say such “immediate expensing” — as opposed to thecurrent system that allows cost recovery for tax purposes only overtime — would stimulate corporations to invest more. But it's one orthe other; a tax system that allows both interest deductibility andimmediate expensing would distort the economic value of debttransactions and spur companies to borrow for tax advantages, notinvestment, said economist Alan Viard of the American EnterpriseInstitute.

“Full expensing is what you would need to do to create ameaningful amount of growth,” said Kyle Pomerleau, director offederal tax projects at the conservative-leaning Tax Foundation inWashington. Pomerleau's research shows that immediate expensing hasa greater impact on GDP growth than just cutting the corporaterate. Trump's tax plan calls for slashing the corporate rate to15%, while the House GOP plan would set it at 20%.

The current corporate tax rate is 35%, but many companies pay afar lower effective tax rate by using various exemptions andcredits in the tax code. Determining which tax breaks to drop tohelp pay for rate cuts will occupy much of Congress's time over therest this year.

The nascent split over interest deductibility isn't the firsttime the White House has taken issue with a key provision in theHouse GOP tax plan. The border-adjusted tax, which would replacethe corporate income tax with a 20% levy on companies' domesticsales and imported goods, has also faced scrutiny from senioradministration officials because of concern that it would raiseconsumer prices on imported goods.

The BAT is estimated to raise more than $1 trillion over adecade. Dropping it and retaining the corporate interest deductionwould make it far harder for any tax legislation to avoid adding tothe federal deficit. And that's a problem for Republicans: UnderSenate rules, a tax bill that would add to the deficit after 10years would either need Democratic support or its provisions wouldhave to be temporary.

Still, if the stakes are high, congressional Republicans havesought to downplay any disagreements with the White House on taxspecifics.

Ryan, who toured a small business in central Ohio Wednesday,said he and his fellow Republicans “completely agree” with thepresident's tax principles and are eager to get started on anambitious tax-code revision.

“Once in every generation, you have an opportunity,'' he said atthe start of a roundtable with business leaders at Accel Inc. “Wehave got a great opportunity in front of us to get this economygrowing.”

Asked about the White House's support for keeping interestdeductibility, a spokeswoman for Republicans on the House Ways andMeans Committee touted the benefits of immediate expensing. Thepanel's GOP members “have proposed full and immediate expensing forall businesses because it will deliver robust economic growth andcreate jobs,” said spokeswoman Emily Schillinger, who added thatit's just one component of the proposed tax overhaul.

The committee is scheduled to hold its first hearing on taxlegislation next week. It will focus on economic growth.

Trump and his economic advisers have said their tax-cut planwill pay for itself by eliminating deductions and loopholes and byhelping to create annual economic growth of 3%. In the Economistinterview, Trump, who has shown little desire for a revenue-neutraltax overhaul, said “it is OK” if the plan increases the deficit inthe short term in order to “prime the pump” for growth. He alsosaid he has yet to reach a decision on interest deductibility.

Many economists say projected “supply side” growth of 3% isunrealistic, and Pomerleau of the Tax Foundation said the goal iseven more remote without the immediate expensing provision fromRyan's plan. The White House press office didn't respond to arequest for comment Thursday evening.

During the campaign, Trump said companies should have a choiceof either continuing to deduct interest expenses or immediatelydeducting the cost of capital expenses. Proponents of keeping theinterest deduction, which include real estate and private equityinvestors, say it would help to achieve policy makers' top priorityof achieving pro-growth tax reform.

Regardless of Trump's ultimate decision, the interestdeduction's proponents may have allies in the Senate.

'Strong Feeling'

“It's important to a lot of companies,” said Sen. John Thune, aSouth Dakota Republican. “And that issue is going to have to bedealt with. They've had different ideas on how to maintain somelevel of deductibility, because it's important.”

Sen. Orrin Hatch of Utah, the chairman of the tax-writingFinance Committee, also indicated that the interest deduction wouldsurvive.

“I have a strong feeling that they're not going to get rid ofinterest deduction,” Hatch said. “But you never know.”

Senate Majority Whip John Cornyn said Republicans will have to“come up with a unified plan” on taxes and the fate of the interestdeduction is “just one piece of the larger puzzle.” For now, theSenate is focused on crafting health-care legislation, and it's tooearly to get into specific details on taxes, he said.

“I think everybody's sort of in the listening stage,” Cornynsaid.

Bloomberg News

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