President Biden has proposed raising the corporate tax rate from the current 21% to 28%.
The 2017 Tax Cut and Employment Act (TCJA) lowered the tax rate from 35% to its current level, putting the US in the middle of the field with other developed nations and ensuring that we are competitive in the global economy. Before that reduction, US investment and jobs in other developed countries were bleeding because our rate was so much higher than average. The weighted average of the Organization for Economic Cooperation and Development (OECD), an organization of the industrialized nations, is currently 26.3%. When added to the average federal tax rates, the combined US tax rate before TCJA was close to 40%. For comparison: China’s tax rate is 25% and Ireland’s 12.5%. These key factors alone show why tax reform was urgently needed. The strong economy before COVID-19 showed it was working.
The TCJA wasn’t just a rate reduction, however. It was really tax reform because it widened the tax base to nearly $ 700 billion. The business community paid for a large part of their tax cut.
Recently we saw that increasing the rate to 28% in Congress is losing steam, with some, including President Biden, expressing willingness to negotiate and increasing it to 25% instead.
The president often declares that he wants to increase the rate less than the TCJA cut it, arguing that the rate increase will not be too damaging because we will not be going back to the previous rate. However, the truth is that increasing the rate to as much as 25% would be extremely harmful.
Competitive, it would bring us back close to where we were before the tax reform. Combined with the average government tax rate, our tax rate would be 29.3%, again above the OECD average. And well above China’s 25% rate.
The impact on punishment would extend even further to the state level. Any state with a corporation tax would have a higher tax rate than the OECD average and China. In some key countries, interest rates would be well above these benchmarks.
In addition, the comparison of the increase in the tax rate under the now broader tax base with the tax legislation before the tax reform is an apples-to-oranges comparison rather than the bigger picture. A recent report from the National Association of Manufacturers shows how damaging a rate hike to 25% would be, noting that a rate of 25% would cost the economy 1 million jobs in the first two years and an average of 500,000 jobs in ten years. It would also cut GDP by $ 107 billion in the first two years. These are great, painful effects.
The corporate tax increase is proposed to finance infrastructure spending. While we agree with the administration that we need infrastructure investments, there are better ways to pay for it than reversing the progress of tax reform.