The creation of the federal corporate income tax occurred in 1909, when the uniform rate was 1% for all business income above $5,000. Since then the rate has increased to as high as 52.8% in 1969. Today’s rate is set at 21% for all companies.
Proponents of raising the corporate tax rate argue that corporations should pay their fair share of taxes and that those taxes will keep companies in the United States while allowing the US federal government to pay for much needed infrastructure and social programs.
Opponents of raising the corporate tax rate argue that an increase will weaken the economy and that the taxes will ultimately be paid by everyday people while driving corporations overseas. Read more background…
Pro & Con Arguments
Raising the corporate income tax rate would make taxes fairer.
As a 2021 Biden Administration White House statement explains, “The current tax system unfairly prioritizes large multinational corporations over Main Street American small businesses. Small businesses don’t have access to the army of lawyers and accountants that allowed 55 profitable large corporations to avoid paying any federal corporate taxes in 2020, and they cannot shift profits into tax havens to avoid paying U.S. taxes like multinational corporations can. U.S. multinationals report 60 percent of their profits abroad in just seven low tax jurisdictions that, combined, make up less than 4 percent of global GDP. These corporations do not make money in these countries; they just report it there to take a huge tax cut. In 2018, married couples making about $150,000 working at their own small business paid over 20 percent of their income in federal income and self-employment taxes. By contrast, U.S. multinational corporations paid less than 10 percent in corporate income taxes on U.S. profits.”
Large corporations have the ability to pay more taxes without much effect. Kimberly Clausing, Deputy Assistant Secretary for Tax Analysis at the US Department of the Treasury, stated, “Corporate taxes are paid only by profitable corporations, and for those without profits, any percent of zero is zero. Also, many companies can carry forward losses to offset taxes in future years. However, companies profiting in the current environment, such as Amazon or Peloton, can reasonably be expected to contribute a share of their pandemic profits in tax payments.”
Clausing explained, “The corporate tax, when it does fall on profitable companies, mostly falls on the excess profits they earn from market power or other factors (due to the dominance of large companies in markets with little competition, luck or risk-taking), not the normal return on capital investment. Treasury economists calculated that such excess profits made up more than 75% of the corporate tax base by 2013. A higher corporate tax rate can rein in market power and promote a fairer economy.”Read More
Raising the corporate income tax rate would force companies to invest in the United States, rather than overseas.
The overseas corporate tax rate (GILTI: Global Intangible Low-Tax Income) enacted in 2017 requires corporations to pay just 10.5% on overseas profits. By raising that rate to at least 21%, “the new minimum tax would be calculated on a country-by-country basis rather than on a global average, which would prevent companies from exploiting tax havens to drive their average rate down to the minimum—and eliminate a potential incentive to locate operations in high-tax foreign countries, rather than the United States, if the companies’ average foreign tax rate is below the minimum,” according to experts at the Center for American Progress.
Itai Grinberg, Deputy Assistant Secretary for Multilateral Tax, and Rebecca Kysar, Counselor to the Assistant Secretary for Tax Policy, both of the US Treasury Department, argue that “[u]nder current law, U.S. multinational corporations face only a 10.5% minimum tax on their foreign earnings, half the rate that they pay on their domestic earnings, incentivizing them to operate and shift profits abroad… The Made in America Tax Plan would increase the minimum tax on corporate foreign earnings to 21%, reducing a corporation’s incentives to shift profits and jobs abroad… Under current law, companies have large tax incentives to put activities and earnings offshore; a strong minimum tax can reduce that tax distortion, favoring activity and earnings at home.”Read More
Raising the corporate income tax rate would allow the federal government to pay for much-needed social and infrastructure programs.
Corporate taxes pay for public services and investments that help the companies suceed. By not paying their fair share of taxes, corporations transfer the tax burden to small companies and individuals.
A lower federal corporate tax rate means less government tax revenue, thus reducing federal programs, investments, and job-creating opportunities. When the Tax Reform Act of 1986 reduced the top marginal rate from 46% to 34%, the federal deficit increased from $149.7 billion to $255 billion from 1987-1993. The Congressional Budget Office estimates that President Trump’s Tax Cuts and Jobs Act will increase the projected federal deficit from $16 trillion in 2018 to $29 trillion by 2028.
Experts at the Center on Budget and Policy Priorities concluded of President Trump’s tax cuts (which includied a corporate tax rate cut): “All of that tax cutting also significantly reduced federal revenues. Federal revenues as a share of the economy (gross domestic product, or GDP) stood at 20 percent in 2000. In 2019, at a similar peak in the business cycle, federal revenues had fallen to just 16.3 percent of GDP — which is far too low to support the kinds of investments needed for a 21st century economy that broadens opportunity, supports workers and helps those out of work, and ensures health care for everyone.”Read More
Raising the rate corporate income tax rate would lower wages and increase costs for everyday people.
Using 1970-2007 data from the United States, a Tax Foundation study found that for every $1 increase in state and local corporate tax revenues, hourly wages can be expected to fall by roughly $2.50. Lower wages for workers results in a decreased ability to buy goods, which leads to lower income for businesses and a net increase in unemployment.
Forbes contributor Adam A. Millsap argued, “It is important to remember that corporate taxes must be paid by people. Any corporate tax increase will be paid by either shareholders/owners, employees in the form of lower wages, or customers in the form of higher prices. A study from 2016 finds that shareholders/owners bear around 40% of state corporate income taxes while employees bear 30 to 35%. So, even though corporate tax increases are not levied directly on workers, they still affect workers indirectly by lowering their wages.”
Experts from the Heritage Foundation estimate between 75% and 100% of the cost of the corporate tax falls on American workers, resulting in a 1.27% (about $840 a year) reduction in income for the average worker. They cite research that estimated a loss of 159,000 jobs and a wage reduction of 1.8% if the corporate tax rate were increased to 28%.Read More
Rasing the corporate income tax rate would force companies to take headquarters and earnings overseas.
In 2017, the United States had the third highest combined federal and local average corporate tax rates in the world at about 39%, behind only the United Arab Emirates and Puerto Rico. The high tax rate forced American companies to relocate their employees overseas.
Johnson Controls, a company with a market value of $23 billion, moved its headquarters from Milwaukee, Wisconsin, to Ireland in 2016. In a memo to employees, a spokesperson explained the move would save the company about $150 million dollars in US taxes annually, and that setting up headquarters abroad “retains maximum flexibility for our balance sheet and ability to invest in growth opportunities everywhere around the world.”
High corporate income tax rates encourage US companies to store their foreign earnings abroad instead of investing it into expansion and employment in the United States. The Congressional Joint Committee on Taxation estimated that untaxed foreign earnings of American companies totaled approximately $2.6 trillion in 2015.
A J.P. Morgan study found that 60% of the cash held by 602 US multi-national companies was sitting in foreign accounts. If an income tax cut were offered to companies that returned this cash to the US, an estimated $663 billion could be invested into business expansion and job growth in the United States.Read More
Raising the corporate income tax rate would weaken the economy.
Erica York, economist, and Alex Muresianu, Federal Policy Analyst, both of the Tax Policy Institute, estimated that raising the corporate tax rate to 28% from 21% “would reduce GDP [Gross Domestic Product] by a cumulative $720 billion over the next 10 years.”
They continued, “The $720 billion in lost GDP over 10 years slightly exceeds the estimated $694 billion of tax revenue that would be raised over 10 years after accounting for the smaller economy. For instance, in year 10, the economy would be about $137 billion lower, and the government would raise about $65 billion of revenue—implying about $2.10 of output lost for each dollar of dynamic revenue raised (or about $1.34 using conventional revenue) in the 10th year.”
York and Muresianu explain, “Corporate income taxes are one of the most harmful ways to raise revenue. They place a higher burden on investment, reduce economic output, and reduce after-tax incomes across the income spectrum—negative economic effects that compound over time.”
Bank of America CEO Brian Moynihan said lowering corporate income tax rates would provide a “certainty premium” that would allow businesses to expand: “you would see the economy grow and momentum continue to build, and unemployment continue to ease down… All that will continue to build on itself.”
Business Roundtable Tax and Fiscal Policy Committee Chair Gregory J. Hayes, Chief Executive Officer of Raytheon Technologies Corporation, argued, “Prior to the pandemic, the U.S. corporate tax rate drove economic growth, creating 6 million jobs, pushing the unemployment rate to a 50-year low and increasing middle class wages. From 2018 to 2019, major U.S. companies grew their R&D by 25 percent compared to the two years prior. The current U.S. corporate tax rate has also helped put U.S. businesses on a more level playing field with global competitors and encouraged businesses to invest and grow here in the United States.”Read More
|Did You Know?|
|1. Of the 500 large cap companies (a market capitalization value of more than $10 billion) in the Standard & Poor (S&P) stock index, 115 paid a federal corporate tax rate of less than 20% from 2006-2011, and 39 of those companies paid a rate of less than 10%.|
|2. At 35%, the United States had the highest federal corporate income tax rate of any OECD country in 2012, and at 29.2% it had the OECD's fourth highest effective corporate tax rate in 2011, behind Germany, Italy, and Japan.|
|3. The federal government has collected a corporate income tax since 1909, when the rate was 1% for all business income above $5,000.|
|4. The corporate income tax rate reached 52.8% from 1968-1969, the highest in US history.|
|5. From 1940 to 1942, Congress passed four separate Revenue Acts which raised the top marginal corporate income tax rate from 19% to 40%.|
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