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21 in ‘25: Why Congress Should Hold the Line on the Corporate Rate

Posted: Jun 10, 2024

When the clock strikes midnight on December 31, 2025, a substantial portion of the Tax Cuts and Jobs Act (TCJA) will expire. The forthcoming debate over how and to what extent expiring provisions should be extended is likely to consume the attention of Congress for some time, and debate has already begun. Among the most hotly contested elements of this debate will be the fate of the corporate tax rate, which currently stands at 21 percent.

While the presidential campaign has lacked real policy discussion up to this point, observers should have a fairly good understanding of what the direction of tax policy would be under a President Trump or Biden. Having originally campaigned on a 15 percent corporate tax rate, and signed into law a permanent corporate tax rate of 21 percent, the inclination of a Trump administration to undo his signature policy achievement is unlikely, despite the chatter from some so-called populist quarters.

In its most recent budget, the Biden administration proposed raising taxes by about $5 trillion over the next decade. Included in the administration’s tax proposal is an increase of the corporate tax rate to 28 percent. The Treasury Department’s supporting arguments for this proposal are essentially that raising the corporate tax rate would raise revenue and do so in a progressive fashion. The Treasury also notes that the tax would be in part borne by foreign investors in U.S. firms and therefore would lead to, “no additional Federal income tax burden on U.S. persons.” This argument is at stark odds with the Treasury’s own estimates.

A corporation is nothing more than a legal form of organization for labor and capital – workers and investors. While a corporation bears the legal burden or “incidence” of the corporate tax, ultimately workers and investors bear the economic incidence. There is no serious dispute that labor bears some of the burden of the corporate tax rate. Rather, there is a robust debate about the degree. Some estimates place the burden on labor as well above 50 percent, meaning that more than half of a dollar in corporate tax is ultimately paid by workers through reduced wages.

As it happens, the Treasury Department assumes that labor bears 18 percent of the burden of the corporate tax. The brightline for progressivity for the Biden administration appears to be $400,000, given the president’s pledge not to raise taxes on anyone making below this amount annually. Only about 2.6 percent of U.S. households have earnings above this level, meaning that over 97 percent of households that would bear some of the corporate tax burden fall below this limit. 

While the administration may quibble that this doesn’t count, it certainly does matter to workers’ paychecks. Indeed, based on Treasury’s own estimates, the Biden administration’s proposal to raise the corporate rate to 28 percent would raise about $1.35 trillion over 10 years – and the 95 percent of American taxpayers making less than $300,000 per year would pay $500 billion of it.

The last point raised in defense of hiking the corporate tax rate by the Treasury somewhat contradicts the administration’s progressivity argument. To the extent the corporate tax is borne by foreign shareholders of U.S. firms – share of U.S. taxpayers comprised by labor increases for U.S. based firms.

There is substantial evidence that the TCJA improved investment and economic growth, driven to a large extent by the corporate tax provisions. In the face of this evidence, the administration offers a tepid and contradictory argument for undoing them. As policymakers consider how to address the expiration of elements of the TCJA, they should hold fast to keeping the corporate rate at 21 in ’25.