As Congress is considering President Biden’s proposal to increase the corporate tax rate from 21 percent to 28 percent, it’s important to remember that the Tax Cuts and Jobs Act (TCJA) of 2017 expanded the corporate tax base. A broader corporate tax base means that an increase in the tax rate will have a greater impact on the economy and government revenues than it did before the TCJA was passed.
The TCJA cut the corporate tax rate from 35 percent to 21 percent from 2018, which reduced federal revenues by approximately $ 1.3 trillion over 10 years, according to the Joint Committee on Taxation (JCT). The decrease in revenue has been partially offset by changes in the corporate tax base, such as the abolition of provisions such as the § 199 deduction for domestic production, the introduction of new limits on interest deduction and the reform of the international tax system.
The main changes in the tax base resulted in an increase of approximately $ 1 trillion when including one-off tax revenue on profits repatriated from abroad (see Table 1). Coupled with the lower tax rate, the changes meant that corporate revenues are expected to decrease by about $ 324 billion from 2018 to 2027 – the loss of $ 1.3 trillion in federal revenue from the corporate tax rate cut was due to a About $ 1 trillion in tax hike largely offset by corporate tax base expansion.
Another way to examine how the corporate tax base has expanded since the TCJA looked at how much corporate income is charged for each percentage point of corporate tax. A higher value indicates a broader corporate tax base as it controls the change in the tax rate, although it is also affected by the company’s profitability. However, this is a useful way to see how corporate tax changes play out over time.
As Table 2 shows, one percentage point in corporate tax increased roughly $ 8.5 billion in 2017 before the TCJA and then $ 11 billion in 2019, before moving to $ 7.8 billion due to the coronavirus pandemic impact on profits US dollars fell. This will rise to $ 16.9 billion by 2025 and then to $ 18.3 billion by 2030, according to forecasts by the Congressional Budget Office (CBO), as tax bases such as stricter limits on interest deductions and a higher tax rate are global Intangible Low Taxed Income (GILTI) are starting to work. The bonus depreciation for companies will also expire completely by 2030, which will broaden the tax base even further and at the same time reduce the investment incentive for companies.
|Company sales||$ 299.6||$ 297.0||$ 204.7||$ 230.2||$ 211.8||$ 164.0||$ 252.0||$ 304.0||$ 328.0||$ 355.0||$ 365.0||$ 361.0||$ 369.0||$ 377.0||$ 385.0|
|Corporate tax rate||35%||35%||21%||21%||21%||21%||21%||21%||21%||21%||21%||21%||21%||21%||21%|
|Income per corporate tax point||$ 8.6||$ 8.5||$ 9.7||$ 11.0||$ 10.1||$ 7.8||$ 12.0||$ 14.5||$ 15.6||$ 16.9||$ 17.4||$ 17.2||$ 17.6||$ 18.0||$ 18.3|
|Source: Congressional Budget Office, “The Budget and Economic Outlook, 2021 to 2031” and calculations by the Tax Foundation. Revenue for 2021 and later is forecast by CBO.|
Since 2000, one percentage point in corporate tax has lifted a low of $ 3.8 billion after the recession of the early 2000s to about $ 10.6 billion in 2007, only breaking that mark in 2019 after the tax base was broadened. This is partly because the broader tax base per corporate tax point was collected more than it was before the TCJA.
A broader TCJA corporate tax base is important when considering Biden’s proposed corporate tax increase. A 28 percent tax rate would be applied to a broader tax base, meaning it would have greater revenue and economic impact than a 28 percent tax rate on the narrower pre-TCJA corporate tax base.
My colleagues estimate that Biden’s American Jobs Plan (AJP) would generate about $ 1.7 trillion in corporate revenue over 10 years, about five times the corporate tax cut made under the TCJA. The effects of the broader corporate tax base on revenue and the economy should be considered when assessing Biden’s proposed increase in the corporate tax rate.
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