President Joe Biden has proposed raising the corporate tax rate by one-third to 28%. Biden said he wants to raise the corporate tax rate because a study claimed that many large corporations paid no federal income tax last year.
But raising the corporate tax rate would not address this problem. That’s because it does not address the deductions or credits that cause companies to pay lower taxes. Regardless, raising the corporate tax rate would be a mistake for a number of reasons.
First, the study Biden refers to is not based on actual tax return data and has nothing to do with the corporate tax rate. Studies claiming corporations do not pay enough taxes have been around for years. Raising the corporate tax rate would do nothing to companies that pay no taxes since the rate alone does not address the deductions and credits allowed in determining a company’s taxable income.
This particular study analyzed corporate “book income” as reported in financial statements to shareholders. It did not examine “taxable income,” which companies can reduce by using legal tax deductions and credits enacted by Congress to encourage such things as capital investment, research and development, renewable energy, and other desired goals. If Biden wants these companies to pay more, he should ask Congress to repeal incentives in the form of deductions and credits that companies legally use to reduce their taxes. Compensating for these incentives by raising the corporate tax rate is exactly the wrong step to take to address this problem. 28% of nothing is still nothing.
Second, increasing the corporate tax rate to 28% would put U.S. companies at a global competitive disadvantage, raising the combined federal-state tax rate to one of the highest levels in the industrialized world. Even a 25% tax rate would raise our rates to a level higher than most of our global competitors. For example, China 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 for which Beijing wants to encourage growth.
Third, increasing the corporate tax rate would damage the economic recovery. Studies show that a higher corporate tax rate would reduce capital investment, lower wages, increase prices, hurt job growth, reduce retirement savings, and slow economic growth. Most people would feel an immediate impact from these tax increases through reduced retirement savings as the stock market reacts to increased taxes on corporations. Millions would also see their utility bills increase as regulated utilities must pass incremental costs directly to consumers.
Fourth, corporate tax receipts are already surging without increasing taxes. The latest Congressional Budget Office update projects corporate tax receipts to increase 49% from 2020 to 2022, up 26% from the February estimates, and to a level exceeding the level corporate tax revenues were at before the 2017 corporate tax cuts. CBO now projects corporate tax revenue to nearly double by 2025, increasing 90% from $212 billion to $402 billion.
Fifth, an overwhelming majority oppose raising taxes as the economy is trying to recover from the pandemic and inflation is rising. A HarrisX poll found 80% of registered voters said now is not the right time to raise taxes.
The case is clear. Increasing the corporate tax rate would do nothing to companies that use legal loopholes to avoid paying taxes. But raising the corporate tax rate would harm the economic recovery, raise prices and lower wages, and reduce our global competitiveness.
Bruce Thompson has served as a U.S. Senate aide, assistant secretary of Treasury for legislative affairs, and as director of government relations for Merrill Lynch for 22 years.
