Why Corporate Taxes are Important
This is part our educational blog series “The Short Form” to simplify tax. A tax is a mandatory payment collected by local, State, and National governments from individuals and businesses to cover the cost of general government goods, services, and activities.
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The “Super Bowl” of tax policy is fast approaching. The 2017 tax changes will expire at the end of the year, giving the party in power the opportunity to rewrite the entire tax code. Harris wants to raise it to 28 percent, up from the current rate of 21 percent. Trump wants to reduce it to 20 percent or 15%. Why should everyday Americans care? But lawmakers should think twice before changing the current rate. 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. The tax is supposed to fall on the shareholders (which 61 percent of Americans do, mainly through their retirement accounts), but they are only responsible for about a third. 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. It’s hard to plan a budget if you don’t know your personal income tax rate for next year. Taxes influence many of their decisions, including hiring, investment, and expansion. Taxes influence their expansion decisions, hiring, investment decisions and more. Rates that are constantly changing create uncertainty for producers, which can influence where they manufacture their products. When job creators know their tax burden, it is easier to plan where to expand, hire and develop. The costs would be felt by all sectors of 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 tax rate can open up new opportunities for businesses that they may not have considered when higher taxes were in place. 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 law reform, which lowered the corporate rates, the US was a global 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. (If you want to learn more about these projections, check out some recent blog posts from our federal tax policy team. Sound policymaking requires that we understand who pays the corporate tax burden and what the effects are of a higher rate. 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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