Before the 2017 Tax Cuts and Jobs Act (TCJA), it had been 30 years since any major tax cuts and revisions took place in the U.S. tax code. While most other countries had slashed their rates in those three decades, America was known for having the highest corporate tax rate among industrialized nations. We were losing our competitive edge. Lowering the top statutory corporate tax rate from 35 percent to 21 percent through the TCJA constituted the largest corporate tax cut in U.S. history.
Now a second Trump administration is considering another cut. This time, it would drop from 21 to 15 percent. Keeping corporate rates low is not just good economic policy, but consumers and workers benefit as well.
Businesses can’t just merely absorb extra expenses, and consumers often end up bearing the brunt of them. In the case of corporate taxes, they foot a hefty portion of the bill.
One study found that consumers pay up to 52 percent of the corporate tax burden; another study estimated 64 percent. In 2020 researchers calculated that for every one percentage increase in the corporate tax rate, retail prices increased by 0.17 percent.
Corporate taxes hurt poor households more than any other; they are the most affected by price increases, especially on basic household goods, potentially forcing them to forego goods and services if they become too expensive.
Individuals also absorb corporate taxes through decreased employment and depressed wages.
A study from 2018 that analyzed state corporate taxes found that neighboring counties separated by state borders have different job and income levels. Counties in states with higher corporate tax rates have less employment and lower wage income. According to their estimates, a one percentage point corporate tax increase leads to a 0.2 percent fall in employment in the affected county and total wage income falling by about 0.3 percent. The reverse is true for tax cuts.
In fact, the TCJA improved worker wages.
Before the historic legislation, the average hourly earnings for non-supervisory workers were growing at an annual rate of 2.4 percent. After the tax cuts, however, wage growth for these workers increased to 3.7 percent by October 2019. By April 2020, the average worker was earning about $1,400 more per year than the previous trend would have predicted.
The Ways and Means Committee similarly found that because of the TCJA, real wages rose by 4.9 percent in the two years after the legislation was signed into law, the economy grew an entire percentage point faster than projected, and the “trend of American companies leaving the United States to set up headquarters in other parts of the world came to an end.”
Revenues are also up. Since the TCJA’s 14 percentage point corporate tax cut, corporate tax revenue as a share of GDP has increased by 40 percent (from 1.5 percent to 2.1 percent in 2023). Revenue per capita also nearly doubled from $870 to $1,700.
Policymakers at both the state and federal level should think twice before raising corporate tax rates.
The U.S. Chamber of Commerce finds that even just a one percent increase in corporate taxes would have catastrophic effects in each state across the nation. California, for instance, would see nearly $6 billion in lost wages for workers, nearly $11 billion in higher prices for consumers, and over $4 billion in lower returns to shareholders over a ten-year period if the federal corporate tax rate increased from its current 21 to 22 percent.
Living in a global economy, American companies operate and compete with firms around the world. Countries with high tax rates put companies domestically headquartered within them at an economic disadvantage relative to their foreign competitors. As a result, businesses are incentivized to relocate and operate in lower-tax jurisdictions.
The U.S. Chamber of Commerce notes that 28 different companies took action to move corporate headquarters outside of the U.S. between 2012 and 2016; since the TCJA was enacted, no major “corporate inversions.” A study from last year found that domestic investment increased by about 20 percent since the TCJA; it was even larger for multinational firms.
According to the Tax Foundation, Trump’s 15 percent proposal would raise GDP by 0.44 percent, wages by 0.37 percent, and employment by 93,000 jobs. When low corporate tax rates are implemented, consumers win through a healthy economy where businesses thrive, thereby offering a variety of goods and services at competitive prices.
Keep corporate tax rates low for the good of the economy, the worker, and the consumer.
