How Corporate Income Tax Hikes Affect Us All
Polls often show that people believe tax increases, even if targeted at corporations, will end up hurting middle-class families. And there’s good reason they think that.
Government and academic analyses conclude that everyday people bear the burden of corporate taxes. For example, a 2016 study from then-President Obama’s Treasury Department estimated that those who earn the least experience more economic harm from the corporate income tax than from the individual income tax. The same study concluded that about half of the corporate income tax is borne by families making less than $400,000 annually — the very families President Biden has repeatedly vowed to protect from tax hikes.¹
President Biden has proposed raising corporate income taxes by an amount that is nearly seven times larger than the corporate tax reductions of the 2017 Act, which would result in lower wages and fewer jobs for working class Americans.²
How Do Businesses Respond to Tax Increases?
A tax increase of this magnitude would leave companies with fewer funds for jobs, investment and innovation — the activities we count on companies to perform to grow the economy and provide rising incomes for American families.
The roughly half of the burden not passed on to workers and consumers would instead be borne by the more than half of Americans who own stock either directly or through a retirement account. Additionally, higher corporate taxes cause lower returns for state and local government and private pension plans across the country — putting at risk nurses, schoolteachers, police officers and firefighters who depend on stable pensions in retirement.
So, while a corporation might write a check to the Internal Revenue Service, it’s ordinary people — not some faceless corporate entity — who ultimately will pay the bill.
Corporate Income Taxes in a Global Economy
When the U.S. imposes higher taxes on American companies than other countries impose on their businesses, the higher U.S. tax burden is often described as being unfair to U.S. companies. In truth, it’s unfair to U.S. workers (who receive lower pay), U.S. savers (who have less retirement savings), and U.S. consumers (who pay higher prices). A higher U.S. corporate tax burden is a boon to foreign companies and foreign economies, but a drag on U.S. economic growth.
Under current law, the combined U.S. corporate tax rate, including federal and state taxes, is about average among developed economies. If the U.S. federal corporate tax rate were increased even to 25% it would place the U.S. in a virtual tie for the second worst in the OECD (Figure 1). Outside the OECD, many countries have tax rates that are lower than the current U.S. rate, including China and Hong Kong.
Fig. 1 An increase in the U.S. corporate tax rate would make it one of the highest — if not the highest — among industrialized economies
Corporate Taxes on Foreign Income: The United States is the only country in the world to impose an additional minimum tax on the income its companies earn in foreign markets. That means when a U.S. company competes abroad against foreign companies, the U.S. company is saddled with an additional cost not faced by any of its foreign competitors. This unequivocally is a competitive disadvantage, making it harder to sell its products or services.
The Biden administration has proposed doubling the U.S. minimum tax rate — the tax rate on global intangible low-taxed income (GILTI). Additional U.S. taxes would be imposed on foreign earnings of U.S. companies in any country with an effective tax rate of less than 26.25% (and often higher due to arcane Treasury rules related to allocating expenses). As illustrated in the chart above, a 26.25% rate is higher than the headline rate in the vast majority of countries. Only U.S. multinational companies would face this additional tax burden — not companies headquartered in any other country in the world. The loss in the competitiveness of U.S. companies would likely lead to job losses at home.
While the U.S. continues to push for other countries to adopt their own foreign minimum taxes, it has been four years since the U.S. first adopted one and so far no other country has seen fit to follow. Further, the minimum tax the U.S. is asking other countries to adopt would subject foreign companies to a lower tax rate than the version proposed by the Biden administration to apply to U.S. companies. House Ways and Means Chairman Richard Neal has wisely noted that if the U.S. increases its minimum tax rate before other countries move to adopt a minimum tax, “Then all of a sudden we are out with a rate that perhaps they can undercut.”³ Other irregularities within the GILTI regime would further widen the gap between the tax rates of U.S. and foreign companies even if other countries enacted a minimum tax.
Congress should wait for other countries — especially China and those in Europe — to actually enact minimum taxes that apply to their companies before the United States makes any changes. To act in isolation, and prematurely, would further disadvantage U.S. companies and their American workers.
(2)Between 2022 and 2031, the Biden proposals would increase corporate income taxes by $2,268 billion. Over the first 10 years of the 2017 Act, the revenue loss from its business and international provisions totaled $328.5 billion. See, Office of Management and Budget, FY 2022 Budget, Tables S-3 and S-4 (Baseline corporate income taxes and corporate income taxes under proposals), May 2021, and Joint Committee on Taxation, Estimated Budget Effects of the Conference Agreement for H.R. 1, The Tax Cuts and Jobs Act, JCX-67–17, Dec. 18, 2017.
(3)Bloomberg, “Race for Global Tax Revolution Faces Hurdles in Last Stretch,” June 17, 2021.