How do corporate tax rate changes affect the economy?
How do corporate tax rate changes affect the economy?
Corporate tax policy is front and center in this election. If elected president, Vice President Kamala Harris says she would raise the corporate tax rate from 21% to 28%, while former President Donald Trump is in favor of lowering it to 15%. When you fiddle with the corporate tax rate, what happens to the economy and the government?
Corporations are taxed on the revenue they bring in minus expenses. But one thing they’re not allowed to deduct quite as much from their tax bill is investment — in factories, machines and new lines of business.
“So changing the corporate tax rate is going to change the after-tax return on new investment done by corporations,” explained Kyle Pomerleau, senior fellow at the American Enterprise Institute. “So raising the corporate tax rate can reduce investment, or reducing the corporate tax rate can increase investment.”
A drag on investment can be a drag on productivity and income growth, Pomerleau said. But here is one of the many ways tax policy immediately gets complicated: Congress can decide how deductible new investment is for corporations.
If Congress makes it more deductible, “raising the corporate tax would have a smaller effect on domestic output,” Pomerleau said.
The size of the drag on the economy caused by reduced investment is debated, said Eric Zwick, professor of economics and finance at the University of Chicago’s Booth School of Business.
“This is an active area of research,” Zwick said. “I view the consensus as that it has an effect on investment that is detectable in the data, but that effect is small compared to that direct effect on revenues.”
Revenues, as in government revenues.
“One issue at stake here is whether we raise another $800 billion or a trillion dollars from the corporate tax, or whether we lose a bunch of revenue in corporate tax cuts,” said Kimberly Clausing, a professor of tax law and policy at the University of California, Los Angeles, and former lead economist in the Office of Tax Policy under the Biden administration.
There’s a choice here, she said: spend money on programs or spend money on corporate tax cuts. Others frame it differently: Is the corporate tax the best way to pay for programs? Clausing said taxing corporations is progressive, equitable and better than taxing labor.
“The corporate tax base is incredibly concentrated, much less than 1% of companies account for the vast majority of the tax base, like 90%,” Clausing said.
Pomerleau said there are alternatives to raising the corporate tax.
“You can design seven different tax increases that fall roughly on the same people,” Pomerleau said. “We’ll say they’re high-income households that earn a lot of capital income, and you don’t distort the economy as much.”
That raises another complication in thinking about the corporate tax rate: You can’t think about it alone, said David Shapiro, a partner and chair of the tax group at law firm Saul Ewing.
“There’s this giant weight hanging over everyone’s head with all these tax provisions that are going to expire,” Shapiro said.
Shapiro added all kinds of tax rules are going to be up for grabs after the election. And he said how people and the economy actually respond to tax policy will depend on all of those rules at the same time.
Stories You Might Like
There’s a lot happening in the world. Through it all, Marketplace is here for you.
You rely on Marketplace to break down the world’s events and tell you how it affects you in a fact-based, approachable way. We rely on your financial support to keep making that possible.
Your donation today powers the independent journalism that you rely on. For just $5/month, you can help sustain Marketplace so we can keep reporting on the things that matter to you.
