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Meryl Matthews, Opinion Contributor 07/23/24 02:30 PM ET
Republican presidential nominee Donald Trump offered several reform proposals in his lengthy acceptance speech Thursday night, but his best plan — and the one that would improve economic growth — is to cut the corporate tax rate from 21% to 15%.
As a reminder, Trump proposed a 15% corporate tax rate during the 2016 presidential campaign, but Republicans in Congress thought that was too much. Some Democrats even proposed a 28% rate as a compromise. Republicans settled on a 21% rate instead of Trump’s 15% when they passed the Tax Cuts and Jobs Act of 2017. Not a single Democrat voted in favor of the bill.
Now, President Trump is back to his original 15% proposal, and Democrats want to raise it to 28%, which would likely be their first tax increase.
If Trump wins in November and Republicans take control of the Senate and retain the House of Representatives (which seems likely at this point), Republicans should hold on to Trump’s 15% of seats.
Democrats, progressives and the media will be in uproar because they want high taxes to fund their big spending plans, but a low corporate tax rate is good for the economy for several reasons.
First, it gives the U.S. a competitive advantage. According to the Tax Foundation, the current federal corporate tax rate of 21 percent, plus state and local corporate taxes, would raise that rate to an average of 25.8 percent. By comparison, the average corporate tax rate in European countries is 21.3 percent, and in tax-exempt Ireland, the rate is 12.5 percent. The global average is 23.45 percent.
A 15 percent tax rate (more like 18-19 percent if you include state taxes) would make the U.S. a very attractive place to locate companies, which leads to my second point.
It keeps companies in the U.S. and attracts more. Trump wants companies to build factories and base their headquarters in the U.S. The best way to achieve that goal is through lower corporate tax rates and less regulation, not through tariffs, as Trump proposes, or taxpayer subsidies, as Biden proposes.
Before the TCJA, many large U.S. companies engaged in “inverting,” which is the process by which a company moves its legal presence overseas to reduce its corporate tax burden. Since the TCJA was passed, corporate inverting has all but disappeared.
However, with an attractive corporate tax rate of 15%, several large foreign companies are likely to relocate their headquarters and manufacturing bases to the United States.
Third, there is a long-held belief among many economists that corporations don’t pay taxes, but rather that citizens do; that is, business taxes are simply passed on to consumers in the form of higher prices. For example, economists and former Senators Phil Gramm (R-Texas) and Mike Solon have argued that “corporations are ‘pass-through’ legal structures, a piece of paper in a Delaware filing cabinet. When corporate tax rates increase, corporations try to pass the cost on to consumers…To the extent that they cannot pass on the entire cost of tax increases to consumers, the cost is borne by employees and investors.”
But aren’t these corporations just run by greedy rich people who don’t want to pay their “fair share,” as Biden likes to claim? In fact, corporate tax revenues are higher than ever, at $410 billion in 2023. But ask yourself: Is it greedy to think you can spend your money better than the government and try to legally limit your personal income tax liability? Corporations are no different in that respect.
But wouldn’t a 15% tax rate reduce federal revenue? Maybe. The Tax Foundation argues that lowering tax rates would boost growth, but it also estimates that it would reduce federal revenue by $460 billion over 10 years.
There are two answers to this objection. First, critics have argued that the TCJA also reduced federal revenues, which have increased since its passage except in 2020, when the economy shut down. Second, Trump also promised to cut federal spending, without providing specifics. This is important because, as The Wall Street Journal explains, the federal debt explosion is the result of a spending problem, not a revenue problem.
There are reasons to be skeptical of the claims for spending cuts, but if President Trump were to cut corporate tax rates and federal spending, that would be the kindest cut possible.
Merrill Matthews is a Resident Research Fellow at the Institute for Policy Innovation in Dallas, Texas. X@MerylMatthews.
