The U.S. must prioritize crafting a tax code that fosters economic growth while ensuring stability and fairness. Balancing immediate fiscal concerns with long-term investment incentives is essential for sustaining a competitive edge in the global market.
Between the attempted assassination of one party's nominee and the other party's possible replacement of its candidate, the 2024 election has become one of the most unusual in modern times. Sadly, it is also completely devoid of meaningful discussions on critical issues such as taxes, energy or trade.
This situation has frustrated the businesses, small and large alike, that are trying to survive in an already uncertain economy. A 2025 “Tax Armageddon” looms as provisions of the Tax Cuts and Jobs Act of 2017 are set to expire. It will be the first item on the agenda for the next administration and will command the attention of everyone in the country next year. Both potential administrations see it as an opportunity to pursue their own specific goals on taxes.
As signaled by his recent budget proposal, President Biden and congressional Democrats want to seize this opportunity to raise taxes, in the name of controlling the rising U.S. debt and driving certain social policy goals. On the other hand, a second term Trump presidency could mean continuation of the same tax provisions, or a even a further lowering of corporate tax rates.
Whatever plan is being drawn up by the parties, the elephant in the room will be the rising U.S. deficit and ballooning debt. According to the most recent numbers published by the Congressional Budget Office, in 2024 the deficit will reach $2.0 trillion and will grow to $2.8 trillion by 2034 (7 and 6.9 percent of GDP, respectively). Debt held by the public will rise from 99 percent of GDP in 2024 to 122 percent in 2034.
Members of Congress on both sides of the aisle will have a very difficult job drafting a tax proposal keeping these numbers in mind, probably leading to several temporary provisions, as has become a staple of U.S. tax policy.
Yes, the numbers are dire. But the sole focus of whoever leads the country over the next four years should not be on our debt problem, but rather on creating a balanced tax code for a 21st century free from uncertainty. While doing that, it is important to keep in mind that not all taxes are equal and certain taxes distort economic decisions more than the others.
In a world of heightened international competition for the capital that fuels productive investment, keeping certain tax rates lower could be more important for economic growth while still bringing in much needed tax revenue for the U.S. coffers.
There is no doubt the corporate income tax rate and corporate tax provisions will be the center of attention during the upcoming tax debate. Before the 2017 tax law, the U.S. had one of the highest statutory corporate income tax rates (at 35 percent) in the Organization for Economic Cooperation and Development group. Both parties recognized how this high rate was putting U.S. corporations at a competitive disadvantage.
The 2017 act reduced this rate to 21 percent, putting the U.S. slightly below the OECD average of 23.7 percent (based on 2023 tax rates). Although the lower rate decreased corporate tax revenues in the first few years after enactment of Tax Cuts and Jobs Act, revenues returned to pre-tax cut levels after 2021.
Even though it cannot be fully attributed to tax policy, another interesting data point to watch is the number of Fortune 500 companies headquartered in the U.S. compared to other countries over time. As outlined by a recent study by Ernst and Young, other factors could have equally important impacts on a company’s performance, such as a country's regional economic growth and stability, local infrastructure, regulatory environment, labor availability and productivity, and tax policies.
But nevertheless, we are seeing positive movement in the numbers: Between 2000 and 2019, the U.S. saw a steady decline in its share of companies on the Fortune 500 list, going from 179 to 121. Over the same period, China went from 10 companies to 119 on the list, a more than ten-fold increase. But this trajectory changed after 2020, with the number of U.S. on the list increasing to 136 in 2023, compared to 135 companies for China, whose current corporate rate stands at 25 percent, similar to the average combined federal and state U.S. tax rate (25.8 percent).
The tax rate is one part of the equation. Favorable provisions on investment, such as expensing and depreciation, have also played a key role in increasing business investment. A recent study shows that firms that had a decrease in taxes as a result of the 2017 tax law increased their domestic investment by roughly 20 percent compared to firms that had no tax change.
The U.S. must prioritize crafting a tax code that fosters economic growth while ensuring stability and fairness. Balancing immediate fiscal concerns with long-term investment incentives is essential for sustaining a competitive edge in the global market. American voters deserve an honest conversation on this from both candidates.
Pinar Çebi Wilber, Ph.D., is executive vice President and Chief Economist of the American Council for Capital Formation
