P.Resident Joe Biden has proposed raising the corporate tax rate by a third to 28%. Biden said he wanted to raise the corporate tax rate because a study claimed that many large companies didn’t pay federal income tax over the past year.
However, raising the corporate tax rate would not solve this problem. This is because it does not take into account the deductions or credits that cause businesses to pay lower taxes. Regardless, raising the corporate tax rate would be a mistake for several reasons.
First, the study Biden is referring to is not based on actual tax return data and has nothing to do with corporate tax rate. Studies claiming companies don’t pay enough taxes have been around for years. Raising the corporate income tax rate would be of no use to companies that do not pay taxes, as the rate alone does not take into account the deductions and credits that are allowed in determining a company’s taxable income.
This particular study analyzed the “book earnings” of companies as reported to shareholders in their financial statements. It has not examined the “taxable income” that companies can reduce by using statutory tax deductions and credits by Congress to promote such things as capital investment, research and development, renewable energy, and other desirable goals. If Biden wants these companies to pay more, he should urge Congress to remove incentives in the form of deductions and credits that companies are legally using to lower their taxes. Compensating for these incentives by increasing the corporate tax rate is exactly the wrong step in addressing this problem. 28% of nothing is still nothing.
Second, increasing the corporate tax rate to 28% would put US companies at a global competitive disadvantage and raise the combined federal and state tax rate to one of the highest levels in the industrialized world. Even a tax rate of 25% would raise our tax rates to a level higher than most of our global competitors. China, for example, has a headline rate of 25% but gives lower rates to certain industries such as high-tech and integrated circuit companies, as well as other industries that Beijing wants to stimulate growth for.
Third, an increase in the corporate tax rate would hurt the economic recovery. Studies show that a higher corporate tax rate would reduce capital investment, lower wages, raise prices, hurt employment growth, reduce retirement savings, and slow economic growth. Most people would feel an immediate impact from these tax hikes through reduced retirement savings as the stock market reacts to the increased taxes on companies. Millions would also increase their electricity bills as regulated utility companies would have to pass additional costs directly on to consumers.
Fourth, corporate income tax revenues are already increasing without increasing taxes. The latest update from the Congressional Budget Office predicts that corporate tax revenues will increase 49% from 2020 to 2022, 26% from February estimates and to a level in excess of corporate tax revenues prior to the 2017 corporate tax cuts. CBO now predicts that corporate tax revenues will nearly double by 2025, increasing 90 percent from $ 212 billion to $ 402 billion.
Fifth, an overwhelming majority oppose a tax hike as the economy tries to recover from the pandemic and inflation rises. A HarrisX poll found that 80% of registered voters said this was not the time to raise taxes.
The case is clear. An increase in the corporate tax rate would be of no use to companies using loopholes to avoid taxes. But an increase in the corporate tax rate would hurt economic recovery, raise prices and lower wages, and reduce our global competitiveness.
Bruce Thompson served for 22 years as Senate Aide, Assistant Secretary of the Treasury for Legislative Affairs, and Director of Government Relations for Merrill Lynch.