At least seven Democratic presidential candidates have proposed raising the corporate income tax rate this primary season. The December 2017 tax reform law lowered the corporate income tax rate from 35 percent to 21 percent. Increasing the rate would have a negative impact on the U.S. economy by raising the cost of investing in the United States.
The candidates have proposed various new, higher corporate income tax rates and plan to use the resulting revenue for a variety of programs. Senator Amy Klobuchar (D-MN) has proposed raising the corporate tax rate to 25 percent; former Vice President Joe Biden and Governor Steve Bullock (D-MT) have suggested raising the rate to 28 percent; and Senator Elizabeth Warren (D-MA), Senator Bernie Sanders (I-VT), former HUD Secretary Julián Castro, and South Bend, Indiana Mayor Pete Buttigieg have proposed restoring the rate to its pre-reform level of 35 percent.
Using the Tax Foundation General Equilibrium model, we estimated the long-run economic effects of raising the corporate income tax rate to 25 percent, 28 percent, and 35 percent.
Source: Tax Foundation General Equilibrium Model, October 2019.
|25 percent||28 percent||35 percent|
|Gross Domestic Product (GDP)||-0.5%||-1.0%||-2.1%|
|GDP, Billions of 2016 $||-98||-179||-393|
|Full-time Equivalent Jobs||-103,000||-187,000||-413,000|
The corporate income tax has a negative impact on the economy. Potential investments must meet the required after-tax rate of return, or hurdle rate, to be worthwhile for a business to pursue. Imposing a corporate income tax raises the pretax return required to yield an acceptable after-tax return, as the return must cover the tax. Thus, the corporate income tax limits capital formation, which discourages growth in productivity, output, employment, and wages.
The burden imposed by the corporate income tax is split among workers in the form of lower wages, shareholders in the form of lower returns, and customers in the form of higher prices. In the long run, the burden falls hardest on the least mobile factor in the economy—typically workers—as it is more difficult for a worker to move if their job location changes than a business to invest elsewhere or for a customer to purchase from a competitor.
For example, restoring the corporate income tax rate to its pre-reform level of 35 percent would reduce the long-run level of output by 2.1 percent, wages by 1.8 percent, and full-time equivalent jobs by 413,000.
While virtually all taxes have varying degrees of negative impact on economic growth, the corporate income tax is considered the most harmful. As the Democratic candidates search for sources of revenue to fund their policy ideas, they should especially avoid economically damaging tax increases such as raising the corporate tax rate.
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Author: Kevin Kaufman
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