Republican presidential nominee Donald Trump tossed out several reforms in his mega-long acceptance speech on Thursday night. But his best reform proposal, and one that would improve economic growth, is cutting the corporate income tax rate from 21 percent to 15 percent.
As a reminder, Trump proposed a 15 percent corporate rate in his 2016 presidential campaign, but Republicans in Congress thought that was a bridge too far. Some Democrats suggested a compromise rate of 28 percent. Republicans settled on 21 percent instead of Trump’s 15 percent when they passed the The Tax Cuts and Jobs Act of 2017 (TCJA). Not one Democrat voted for the bill.
Now, Trump has returned to his initial 15 percent proposal. Democrats want to raise it to 28 percent — though that would likely be their first tax-increasing step.
If Trump wins in November and Republicans take control of the Senate and keep the House — which at this point looks likely — they should let Trump have his 15 percent.
Democrats, progressives and the media will have a meltdown because they want high taxes to help fund their big-spending agenda. But a low corporate tax rate is good for the economy for several reasons.
First, it gives the U.S. a competitive advantage. In addition to the 21 percent current federal corporate income tax rate, state and local corporate taxes push that rate up to an average of 25.8 percent, according to the Tax Foundation. By contrast, the average corporate income tax rate for European countries is 21.3 percent, and Ireland’s rate, which has become a tax destination, is 12.5 percent. The worldwide average is 23.45 percent.
A 15 percent rate — which would be more like 18 to 19 percent with state taxes included — would make the U.S. a very attractive place to locate businesses, which takes us to the second point.
It keeps companies in the U.S. and attracts even more. Trump wants companies building factories and headquartering in the U.S. The best way to achieve that goal isn’t his proposed tariffs or Biden’s taxpayer-provided subsidies, but having a low corporate tax rate and light regulations.
Before the TCJA, lots of large U.S. companies were “inverting.” That’s “a process by which companies relocate their legal location overseas to reduce their income tax burden.” After TCJA passage, corporate inversions largely ceased.
However, with an attractive 15 percent corporate tax rate, we’re likely to see multiple large foreign corporations shift their headquarters or manufacturing to the states.
Third, there is a longstanding belief among many economists that corporations don’t pay taxes, people do — i.e., that business taxes are just passed on to consumers in the form of higher prices. For example, economist and former Sen. Phil Gramm (R-Texas) and Mike Solon argue, “A corporate entity is a ‘pass through’ legal structure — a piece of paper in a Delaware filing cabinet. When the corporate tax rate increases, corporations try to pass the cost on to consumers… To the degree that the entire cost of the tax increase can’t be passed on to consumers, those costs are borne by employees and investors.”
But aren’t these corporations just run by greedy fat-cats who don’t want to pay their “fair share,” as Biden often claims? In fact, corporate income tax revenue is higher than ever, $410 billion in 2023. But ask yourself this question. Are you being greedy when you seek to legally limit your personal income tax obligation, thinking you earned the money and can spend it better than the government? Corporations are no different in that regard.
But won’t the 15 percent rate reduce federal revenue? Maybe. While the Tax Foundation claims the rate cut would be pro-growth, it also estimates it would reduce federal revenue by $460 billion over 10 years.
There are two responses to this objection. First, critics also claimed the TCJA would reduce federal revenue, and yet federal revenue rose after passage, except in 2020 when the economy shut down. Second, Trump has also promised, without providing specifics, to cut federal spending. That’s important because, as the Wall Street Journal explains, the exploding federal debt is the result of a spending problem, not a revenue problem.
There’s reason to be skeptical of the spending-cut claim, but if Trump cuts corporate tax rates and federal spending, those would be the kindest cuts of all.
Merrill Matthews is a resident scholar with the Institute for Policy Innovation in Dallas, Texas. Follow him on X@MerrillMatthews.
