Unless corporations and the wealthy pay their fair share of taxes, the US will struggle to address numerous pressing challenges, including rising inequity, deteriorating national infrastructure, and the urgent demands of climate change.
The 2017 Tax Cuts and Jobs Act slashed the corporate tax rate from 35% to 21%. It also gave corporations other tax breaks, such as greater expensing allowances on the cost of investment. Along with regressive cuts to personal income taxes, the legislation amounted to a giveaway to shareholders and wealthy households.
Several provisions of former President Donald Trump’s tax law will expire next year. While its corporate tax rate cut is permanent—that is, it would take an act of Congress to repeal it—policymakers are gearing up for another battle over corporate taxes. A diverse range of Democratic groups are pushing for higher corporate taxes, while Republicans prioritize defending the 2017 permanent rollback and are eyeing further tax cuts.
Much of the current discussion about corporate taxes is framed in terms of weighing the revenue gains of the corporate tax against the potential cost to the economy. Advocates of such corporate tax cuts conventionally claim that corporate taxes are distortionary, reduce economic efficiency, and discourage investment, resulting in lower wages and slower economic growth.
Standard economic theory explains why this narrative—one that is part of conventional trickledown thinking—is just wrong. Indeed, there are economic and social benefits to the corporate tax that go beyond the revenue raised.
Most fundamentally, critics of the corporate tax say it’s a tax on corporate investment or capital. But it isn’t. The US tax code allows businesses to deduct most of the cost of investment from their taxable income, directly or indirectly through depreciation and the cost of borrowed funds.
This means that it’s more accurate to think about the corporate tax as a tax on pure profits—beyond the costs of investment. The distinction is key because it means that corporate taxes don’t significantly affect business investment or employment. Indeed, with loss deduction provisions, the government shares in business risks through the corporate tax, which is important in a world in which markets are far from perfect. This risk-sharing encourages high-risk, high-return investments.
An increasingly large portion of corporate earnings comes from market power—that is, profits derived from the ability of businesses to raise prices on consumers beyond the cost of production. Academic research has shown that market power has systematically increased in the US during the last few decades due to decreasing competition.
The rise in market power has contributed to extraordinary profits exceeding what would be justified in a well-functioning competitive market. These profits come at the expense of consumers, and they inflate the financial portfolios of wealthy shareholders, which exacerbates economic inequality.
A tax on monopoly profits also discourages efforts by corporations to enhance their market power. Higher profits get translated into higher share prices—and as investors put their money into buying into the fruits of monopoly, there are less savings left over for real, productive investment. By taxing those profits, the corporate income tax contributes to a more efficient, dynamic, and less unequal economy, even apart from the revenue raised.
And the revenue can be significant. Estimates suggest that increasing the corporate tax rate to 28% would raise about $1.35 trillion over the next 10 years. To put this in perspective, the figure is more than triple what the federal government is projected to spend on child nutrition programs during the same period. It is also enough to cover the unprecedented $1.2 trillion allocated for transportation and infrastructure spending under the Bipartisan Infrastructure Law.
Lowering the corporate tax rate would be counterproductive. Some see such lowering as an attempt to attract jobs and investment from other countries. The US won’t succeed in attracting those jobs though, as other countries will respond similarly. This race to the bottom won’t increase global investment. The only winners will be corporations, while the world will suffer from increased inequality, reduced fiscal resources, and more untaxed monopoly power.
The US should show leadership, both in what we do at home and what we advocate abroad. We should raise the corporate tax rate to at least 28%. Additionally, we must push for an international agreement on a 25% global corporate minimum tax, as the Independent Commission on the Reform of International Corporate Taxation has been campaigning for. This is much higher than the 15% that the OECD has suggested—which, with “carve-outs,” is effectively more like 12% to 13%, based on data from the EU Tax Observatory.
Corporations play an important role in our society. And they benefit enormously from what governments provide them: infrastructure; a modicum of economic stability; the foundations of science and technology on which their businesses rest; and the rule of law, without which they couldn’t thrive. They need to pay their fair share.
This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.
Author Information
Joseph E. Stiglitz is a Nobel Laureate in economics, professor at Columbia University, and co-president of the Initiative for Policy Dialogue. He serves on the Independent Commission for the Reform of International Corporate Taxation.
Ignacio González and Juan A. Montecino are assistant professors of economics at American University and co-directors of the Institute for Macroeconomic and Policy Analysis.
Write for Us: Author Guidelines
