A Lower Corporate Tax Rate Can Be Part of Broader Tax Reform

As the 2024 presidential campaign season gets fully underway, candidates are beginning to sketch out their taxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities.
policy proposals. One tax proposal embraced by both former President Donald Trump and former Vice President Mike Pence is a reduction in the federal corporate tax rate from 21 percent to 15 percent.

A 15 percent corporate rate would improve U.S. competitiveness and grow the U.S. economy. However, policymakers and candidates should pair tax rate changes with tax baseThe tax base is the total amount of income, property, assets, consumption, transactions, or other economic activity subject to taxation by a tax authority. A narrow tax base is non-neutral and inefficient. A broad tax base reduces tax administration costs and allows more revenue to be raised at lower rates.
reforms to ensure the cost of tax cuts is paid for, investment is not penalized, and broader tax reform is not left off the table.

The 2017 Tax Cuts and Jobs Act (TCJA)The Tax Cuts and Jobs Act in 2017 overhauled the federal tax code by reforming individual and business taxes. It was pro-growth reform, significantly lowering marginal tax rates and cost of capital. We estimated it reduced federal revenue by .47 trillion over 10 years before accounting for economic growth.
permanently reduced the U.S. corporate tax rate from 35 percent to 21 percent. The rate reduction was part of a larger tax reform to move the U.S. from a worldwide system of taxing profits regardless of where they were earned to a territorial system focused on profits earned in the U.S.

The reforms boosted U.S. competitiveness, lowering the combined corporate rate from 38.9 percent in 2017—then the highest in the OECD—to 25.8 percent as of 2023. The U.S. rate is now just under the OECD weighted average of 26.2 percent, though slightly higher than the OECD simple average of 23.5 percent.

The current corporate tax rate leaves room for more progress to enhance U.S. competitiveness. Reducing it to 15 percent would bring the combined U.S. rate down to 20.1 percent, just above Estonia’s combined rate of 20 percent. In the OECD, only Hungary, Ireland, and Luxembourg would have a combined corporate tax rate significantly lower than the U.S.

Enhanced international competitiveness will make the U.S. a more attractive location for business investment, raising economic opportunities for American households and reducing incentives for businesses to move operations overseas.

Reducing our reliance on corporate taxes to raise revenue would bring economic benefits in addition to added international competitiveness. According to our estimates using the Taxes and Growth model, a 15 percent corporate rate would increase long-run GDP by 0.5 percent, raise wages by 0.4 percent, and create about 91,000 full-time equivalent jobs. As economic research has consistently shown, corporate taxes are among the most damaging types of revenue raisers, disincentivizing investment and reducing long-run wages for workers.

Lowering the corporate rate to 15 percent would reduce federal revenue by $522 billion from 2024 to 2033 on a conventional basis, assuming it is enacted beginning in 2025. After factoring in positive economic feedback on federal revenues, the proposal would cost about $377 billion over 10 years. In 2033, revenue would fall by $62.4 billion on a conventional basis but by a smaller $35.4 billion on a dynamic basis.

The revenue loss of moving to a 15 percent corporate rate would raise the debt-to-GDP ratio from 237.1 percent in 2065 to 240.8 percent on a conventional basis. When including the positive economic effect of the lower rate, the debt-to-GDP ratio rises to 238.1 percent, one percentage point above the baseline ratio.

A 15 percent corporate rate would increase after-tax incomeAfter-tax income is the net amount of income available to invest, save, or consume after federal, state, and withholding taxes have been applied—your disposable income. Companies and, to a lesser extent, individuals, make economic decisions in light of how they can best maximize after-tax income.
s across all income levels. The bottom 20 percent of households would see a 0.8 percent increase in incomes on a conventional basis. After factoring in economic growth, it would raise their long-run incomes by 1.2 percent. After-tax incomes would rise further as income increases, for example, by 2 percent for the top 1 percent of households.

The lower corporate tax rate would increase incomes by growing investment, wages, and jobs as well as by increasing the after-tax return on investment for owners of corporate equities, which include a large swath of Americans across all income levels. Workers would see higher wages, as at least half of the burden of corporate taxes is ultimately born by workers as opposed to owners of corporate stock.

While a 15 percent corporate rate would help the U.S. be more competitive and raise economic output, candidates and policymakers must also remember that we need an efficient corporate tax base too. Currently, businesses cannot fully recover the cost of investment, as they must amortize R&D expenses over five (or fifteen) years, and bonus depreciationBonus depreciation allows firms to deduct a larger portion of certain “short-lived” investments in new or improved technology, equipment, or buildings, in the first year. Allowing businesses to write off more investments partially alleviates a bias in the tax code and incentivizes companies to invest more, which, in the long run, raises worker productivity, boosts wages, and creates more jobs.
is beginning to phase out. These investment penalties will blunt any positive effects of a corporate rate reduction, repeating a mistake from past tax reforms.

In addition to tackling the TCJA-related business tax hikes, policymakers should also consider placing corporate tax rate changes within a broader reform package that ensures taxes do not penalize investment, treats businesses the same regardless of legal form, and broadens the tax base, ultimately setting the federal government on a more stable and sustainable fiscal trajectory.

Share

Twitter
LinkedIn
Facebook
Email