The “Super Bowl of tax policy” is fast approaching. At the end of next year, key provisions from the 2017 tax reforms will expire, presenting a critical opportunity for the ruling party to overhaul the tax code.
Vice President Kamala Harris and former President Donald Trump have starkly contrasting views on tax policy, particularly regarding the corporate tax rate. Harris has proposed raising it to 28 percent from the current 21 percent, while Trump aims to reduce it to either 20 percent or 15 percent. But which approach is better? And why should it matter to everyday Americans?
Impact of the Corporate Tax Rate on Everyday Americans
As the national debt crisis worsens, raising revenue from corporations might seem tempting. However, lawmakers must carefully consider the consequences of altering the current corporate tax rate.
A primary reason corporate tax hikes appear appealing is the perception that they target wealthy shareholders, ensuring they “pay their fair share.” However, while corporations may remit the tax to the government, in reality, workers and consumers bear much of the cost.
Economic evidence shows that corporate tax increases lead to higher consumer prices and lower wages, disproportionately affecting workers with fewer skills and less experience.
The tax aims to impact shareholders (a role held by 61 percent of Americans, mainly through retirement accounts), but shareholders only shoulder about a third of the burden. The rest falls on workers and consumers.
Thus, raising the corporate tax rate would not limit negative effects to the wealthy alone.
Stability and the Corporate Tax Rate
Stability is a key principle of sound tax policy because it aids in planning. Uncertainty about future personal income tax rates complicates budgeting and major financial decisions. This uncertainty also affects businesses, albeit on a larger scale, influencing decisions on expansion, hiring, investment, and more.
Many politicians advocate for policies to “make things in America again.” A stable corporate tax policy is essential for this goal, as fluctuating rates create uncertainty for producers, influencing their location choices.
Although a corporate tax hike wouldn’t cause immediate economic disaster, it would have widespread costs. Shareholders would see reduced returns, families would face higher costs, and job opportunities would diminish.
Investment and the Corporate Tax Rate
The corporate tax rate significantly impacts investment. Lower rates encourage businesses to pursue opportunities they might otherwise avoid due to higher tax costs. For instance, the 2017 tax reform, which reduced the corporate rate from 35 percent to 21 percent, substantially boosted domestic investment, creating more jobs and enhancing living standards.
Nations compete for foreign investment, and a lower corporate rate can make a country more attractive. Before 2017, the US was an international outlier with its high corporate rate. Post-reform, the US moved to a more competitive position.
Analyzing Candidate Proposals for the Corporate Tax Rate
What would Harris’s proposed 28 percent corporate rate mean? We estimate it would lower long-term GDP by 0.61 percent, reduce wages by 0.52 percent, and result in 125,000 fewer jobs, while raising $760 billion over 10 years.
Conversely, Trump’s 15 percent proposal could raise GDP by 0.44 percent, increase wages by 0.37 percent, and create 93,000 jobs, though it would decrease revenue by $460 billion over the same period.
(For more details on these projections, explore our recent blog posts from our federal tax policy team.)
Sound tax policy considers the impacts on real people. Understanding who bears the corporate tax burden and the effects of rate changes is crucial. A competitive corporate rate can raise revenue without hampering individuals’ opportunities for growth, innovation, and savings.
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