The outcome of the 2024 U.S. election could significantly impact the current corporate tax rate of 21 percent. Established by the 2017 tax reform, this rate aligned the U.S. with other industrialized nations after years of having the highest rate among them. However, discussions about changing the corporate tax rate are heating up, with major implications for businesses’ domestic investment plans. This uncertainty affects both short-term decision-making and the long-term feasibility of various projects.
Different political leaders propose varied approaches to the corporate tax rate. Former President Donald Trump has suggested lowering the rate to 20 or even 15 percent, while Vice President Kamala Harris has considered raising it to 28 percent, and in the past, it was as high as 35 percent. Each proposed rate would have markedly different effects on the U.S. economy.
Using the Tax Foundation’s General Equilibrium Model, it is estimated that increasing the corporate tax rate to 35 percent could reduce the U.S. economy by approximately 1.4 percent and result in the loss of 289,000 jobs. This change would generate $2.2 trillion in revenue on a conventional basis, which would decrease to $1.6 trillion on a dynamic basis when considering the impact of a smaller economy on other tax revenues. Conversely, lowering the tax rate to 15 percent could boost the economy by over 0.4 percent but would reduce tax revenue by $673 billion on a conventional basis and by $459 billion on a dynamic basis, as a larger economy could increase other tax revenues.
Here’s a breakdown of the estimated change in long-run GDP under different corporate tax rates:
- 15% Corporate Rate: +0.44%
- 16% Corporate Rate: +0.37%
- 17% Corporate Rate: +0.30%
- 18% Corporate Rate: +0.23%
- 19% Corporate Rate: +0.15%
- 20% Corporate Rate: +0.08%
- 22% Corporate Rate: -0.08%
- 23% Corporate Rate: -0.16%
- 24% Corporate Rate: -0.25%
- 25% Corporate Rate: -0.33%
- 26% Corporate Rate: -0.42%
- 27% Corporate Rate: -0.52%
- 28% Corporate Rate: -0.61%
- 35% Corporate Rate: -1.36%
The next president will face difficult choices regarding tax policy. Not only are the individual provisions of the 2017 tax reform set to expire after 2025—which, if extended, could reduce revenue by over $4 trillion—but the federal budget is already on an unsustainable path. This scenario complicates decisions about whether to implement substantial tax cuts or pursue higher revenues.
Research indicates that the corporate income tax is particularly harmful to economic growth, and recent studies have confirmed the benefits of reducing it. The Tax Cuts and Jobs Act (TCJA) of 2017 significantly boosted domestic investment by lowering the corporate rate. One notable finding from recent modeling is that the economic damage per dollar raised by increasing the corporate rate is significant, regardless of the rate increase size. For every billion dollars of revenue raised, a higher corporate rate results in a comparable reduction in economic output.
For example, under a 28 percent corporate rate, it is estimated that by 2034, every dollar of revenue raised on a conventional basis would correspond with a $1.84 decrease in GDP. In the long run, when the full effects of the higher rate are realized, the GDP could drop by as much as $2.19 for every dollar raised.
Rather than adopting one of the most economically damaging forms of tax increase, lawmakers should focus on eliminating inefficient tax expenditures and broadening the tax base to raise revenue. The TCJA’s reduction of the corporate rate to 21 percent has made the U.S. a more attractive location for investment. Future changes to corporate taxes should aim to further encourage investment and innovation, which suggests avoiding higher corporate tax rates and instead focusing on improving cost recovery measures.