President Joe Biden and congressional Democrats want to increase the corporate tax rate to pay for more spending programs. But raising the corporate tax rate above the tax rates our foreign competitors pay would put U.S. companies at a competitive disadvantage and harm U.S. workers, consumers, and our economy.
Even a 25% tax rate would force companies in many states to pay higher tax rates than companies in every other country in the industrialized world. Before 2018, the corporate tax rate was 35%, the highest in the industrialized world. All 38 countries in the Organization for Economic Cooperation and Development had lower corporate tax rates, putting the United States at a global competitive disadvantage. Today, U.S. firms pay a combined federal-state average rate of 25.8%, which is still higher than the 23.1% average rate of OECD countries.
Biden wants to raise the corporate tax rate to 28%, which would raise the combined federal-state average rate to 32.8%, once again the highest tax rate in the industrialized world. Some members of Congress have suggested a 25% tax rate, which would raise the U.S.’s combined rate to 29.5%. That’s better than 32.8%, but it is still too high.
A 25% tax rate would increase the combined rate U.S. companies would pay to more than 6 percentage points above the average OECD tax rate. Thirty OECD countries, our major competitors, would have a lower corporate tax rate in 2022. Even China, which has a nominal 25% rate, would have a lower rate than the 29.5% U.S. rate.
In 2022, Portugal will have the highest corporate tax rate in the world at 31.5%. But at a 25% rate, nine states would have a combined tax rate higher than 31.5%. Companies in these states would face a corporate tax rate higher than every other country in the industrialized world. For example, New Jersey, with a corporate tax rate of 11.5%, would have a combined rate of 33.6% (after deducting state taxes), the highest corporate tax rate in the world. Other states facing world-high tax rates are Pennsylvania, Iowa, Minnesota, Illinois, Alaska, Maine, California, and Delaware, according to a Tax Foundation report.
Companies headquartered in these states would have a major competitive disadvantage with their foreign competitors. They would also be at a competitive disadvantage with companies residing in the 10 states with the lowest combined rates, those being Ohio, Nevada, South Dakota, Texas, Washington, Wyoming, North Carolina, Missouri, North Dakota, and Florida.
Many blue states would be at a real competitive disadvantage to many red states.
The blue state rate, the average rate of New York, California, Illinois, and New Jersey, is especially uncompetitive compared to the red state rate (the average rate of Texas, Ohio, Florida, and Georgia). At a 25% federal rate, the blue state rate would be a full 5% points higher than the red state rate of 26.8%.
If the corporate rate is raised to 25%, many U.S. companies would find added incentive to move out of a high-tax state to one of the low-tax states. Or to foreign countries. The higher tax rate would lead to less capital investment, lower wages, and higher prices, hurting workers, consumers, and our economy.
Bruce Thompson was a U.S. Senate aide, assistant secretary of the treasury for legislative affairs, and the director of government relations for Merrill Lynch for 22 years.
