Why Should I Care About the Corporate Tax Rate?

The “Super Bowl of tax policy” is fast approaching. At the end of next year, much of the 2017 changes to tax policy will expire, giving whichever party is in power the chance to substantially rewrite the tax code.

Vice President Kamala Harris and former President Donald Trump have vastly different approaches, including in one particularly important area of tax policy: the corporate tax rate. Harris has proposed raising it to 28 percent—up from the current 21 percent rate—while Trump has proposed decreasing it to either 20 percent or 15 percent. But which way is better? And why should everyday Americans care?

The Corporate Tax Rate Hits Everyone, Not Just the Wealthy

As our debt crisis worsens, corporations may seem like an easy target for raising revenue. But lawmakers should think twice before changing the current rate.

One reason corporate tax hikes seem attractive is because they’re perceived to fall on wealthy shareholders—another tool to make them “pay their fair share.” But while corporations may remit the tax to the government, workers and consumers pay the price over the long run.

Economic evidence suggests that corporate tax hikes result in higher prices for consumers and lower wages for workers. Workers with fewer skills and less experience are the hardest hit.

The tax is intended to fall on shareholders (a title 61 percent of Americans hold, largely through their retirement savings accounts), but in reality, they shoulder about a third of the burden. The rest is split between workers and consumers.

If the corporate rate increases, the negative effects won’t be contained to just the rich.

An Ever-Changing Corporate Rate Is Unstable

Stability is one of the key principles of sound tax policy because it helps people plan. If you don’t know what your personal income tax rate will be next year, it’s difficult to create a budget or decide what big purchases you can afford. Businesses are like that, too, but their situations are far more complex (and their budgets typically much bigger). They have expansion decisions, hiring decisions, investment decisions, and more—all influenced by taxes.

Many politicians have expressed a desire to “make things in America again.” Corporate tax policy is a key component of that. If rates are ever-changing, it adds uncertainty for producers and influences where they make their products. However, when job creators know what their tax burden will be, it becomes easier to plan where they want to expand, hire, and develop.

It’s true that a corporate tax hike wouldn’t be cataclysmic; the stock market wouldn’t immediately crash and businesses wouldn’t shutter left and right. But the costs would be felt across the economy. Shareholders would begin to see smaller returns, families would see their costs rise, and workers would see fewer job opportunities.

Higher Corporate Rate Would Reduce Investment

The corporate rate also has a significant effect on investment. A lower corporate rate opens up opportunities that businesses may not have explored when higher tax costs were a part of the picture. For example, the 2017 tax reform—which lowered the corporate rate from 35 percent to 21 percent—substantially boosted domestic investment, which translates to more jobs for Americans and higher standards of living.

Countries also compete with each other for foreign investment, and a lower corporate rate helps make them more attractive. Before the 2017 tax reform lowered the corporate rate, the US was an international outlier. After the reform, it moved to the middle of the pack, putting it on more equal footing with its competitors.

Effects of Each Candidate’s Corporate Rate Proposal

So, what would a 28 percent corporate rate, as Harris proposes, actually do? We estimate it would lower long-run GDP by .61 percent, wages by .52 percent, and employment by 125,000 jobs, while raising $760 billion over 10 years.

Trump’s 15 percent proposal, on the other hand, would raise GDP by .44 percent, wages by .37 percent, and employment by 93,000 jobs, while reducing revenue by $460 billion over 10 years.

(If you want to learn more about these projections, check out some recent blog posts from our federal tax policy team.)

Smart tax policy takes into account how policy changes impact real people. Understanding who bears the burden of the corporate tax and the effects of a higher rate are essential to sound policymaking. A competitive corporate rate would help our tax code raise revenue without standing in the way of individuals looking for greater opportunities—for themselves, their families, their innovations, and their savings.

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