The 2025 Corporate Income Tax

I wanted to comment on Richard Rubin’s report at the Wall Street Journal on the argument over the federal corporate income tax. Here’s where he sets the stage:

WASHINGTON—The 21% U.S. corporate tax rate is the biggest single variable in the sprawling 2025 tax debate, and the two parties are trying to turn that dial in opposite directions with major consequences for companies’ profits and federal revenue.

The rate could climb as high as 28% if Democrats sweep November’s elections and move as low as 15% if Republicans gain full power.

President Biden’s plan for a 28% rate would reverse half of Republicans’ 2017 rate cut, pushing the U.S. corporate rate back near the highest among major economies. A 15% rate—some Republicans are heading that way, but the party hasn’t settled on a plan—would match the lowest level since 1935, boosting profits and rewarding shareholders. Presumptive Republican presidential nominee Donald Trump told corporate executives last week that he wanted a 20% rate.

Each percentage point is worth more than $130 billion over a decade in tax revenue, creating a $1 trillion-plus gap between the poles of the parties’ positions and giving the largest U.S. companies an outsize interest in the election’s outcome.

I found Mr. Rubin’s report fair and balanced and he does make some good points, for example:

The corporate tax is one of the most progressive ways of raising revenue, with much of the burden falling on higher-income households, but the reality of who pays it is more nuanced than just saying “companies” or “rich people.” Economists and government agencies generally agree that shareholders ultimately bear much of the cost, with workers and consumers paying some, too. Shareholders, generally, are wealthier than the population as a whole.

The corporate tax is one of the few ways the U.S. can, indirectly, tax foreign investors in U.S. securities and nonprofits with large tax-free endowments.

But the shareholder base also includes pension funds, 401(k) accounts and some middle-income households. Biden and Democrats play down effects on those groups. They also don’t count corporate tax increases as violating the president’s pledge to protect households making under $400,000 from tax hikes.

I thought this post might be a good opportunity for me to put down on marker on taxes more generally.

First, from an economic standpoint the corporate income tax is one of the least efficient taxes. The most efficient corporate income tax rate is 0%. Plus, as has been noted at the rate of 28% which President Biden has advocated our corporate income tax would be higher than those of Italy, Canada, France, Netherlands, India, Belgium, Spain, and Luxembourg. It would also be higher than those of Denmark, Norway, and Sweden. As noted that puts U. S. companies at a competitive disadvantage.

In my view if you want to spend more there are several alternatives:

• Raise the personal income tax and increase the effective tax rate (the taxes that people actually pay). The highest effective tax rate in the United States has been around 21% which is where we are now. Retorting that other countries pay higher rates is an inadequate reply. What works in one country does not necessarily work in another. In some countries they eat bats or snails. We don’t in the United States. Plus just about everything the government does in the United States is more expensive than anywhere else to get the same results. As a consequence people in other places trust their governments more than we do.
• Just issue ourselves credit. That is what we have been doing for some time. Not only is that regressive but we should be prepared for our ability to do that to end suddenly and, potentially, catastrophically.
• Cut spending somewhere else. The most tempting target for economization is interest on the debt which would either require us to default on the debt which would be catastrophic or pay the debt down which would be extremely difficult.
• The perennial: eliminate waste, fraud, and abuse. That has proven a lot harder than it sounds which has led some people to conclude that waste, fraud, and abuse are the purpose of our system.
• Increase production. That has proven harder to accomplish than you might expect.

Raising the corporate tax rate is probably the worst alternative.

I also think that we need more basic reorganization of the federal government but that is a topic for another post. Do we really need 73 federal agencies to have armed enforcement officers and police powers?

I think at the very least we need to follow the law of holes. Stop digging or, in this case, stop cutting taxes. Beyond that spend on what we really want and need to spend on, measured by willingness to pay.