A Lower Corporate Tax Rate Can Be Part of Broader Tax Reform

Former President Donald Trump would like to push for a reduction in the federal corporate taxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. rate from 21 percent to 15 percent if reelected.

While a 15 percent corporate rate would boost growth, it would reduce federal tax revenue when debt and deficits are already unsustainably high, potentially squeezing out other, more pro-growth tax changes that lawmakers will consider in 2025. If a lower rate is a priority, pairing it with reforms that broaden the tax base and remove penalties on investment will be crucial.

The 2017 Tax Cuts and Jobs Act (TCJA) permanently reduced the US corporate tax rate from 35 percent to 21 percent as part of a larger tax reform to move the US from a worldwide system of taxing profits regardless of where they were earned to a territorial system focused on profits earned in the US. The reforms boosted US competitiveness, lowering the combined corporate rate (accounting for the average state tax) from 38.9 percent in 2017—then the highest in the OECD—to 25.8 percent as of 2023. The US rate is now just under the OECD weighted average of 26.2 percent, though slightly higher than the OECD simple average of 23.5 percent.

A lower corporate income taxA corporate income tax (CIT) is levied by federal and state governments on business profits. Many companies are not subject to the CIT because they are taxed as pass-through businesses, with income reportable under the individual income tax. rate would make the US a more attractive location for business investment, creating economic opportunities for American households and reducing incentives for businesses to move operations or profits overseas. The combined US rate would fall to 20.1 percent under Trump’s proposed 15 percent federal corporate income tax rate, just above Estonia’s combined rate of 20 percent. In the OECD, only Hungary, Ireland, and Luxembourg would have a significantly lower rate. Using Tax Foundation’s General Equilibrium Model, we estimate lowering the corporate income tax rate to 15 percent would increase long-run GDP by 0.4 percent, wages by 0.4 percent, and employment by about 93,000 full-time equivalent jobs. As economic research has consistently shown, corporate taxes are among the most damaging types of revenue raisers, disincentivizing investment and reducing long-run wages for workers. Likewise, recent economic research has confirmed that the lower corporate income tax rate under the TCJA boosted investment, lifted wages, and grew economic output.

Table 1. Long-Run Economic Effects of Reducing the Corporate Tax Rate to 15 Percent

Source: Tax Foundation General Equilibrium Model, July 2024.

Lowering the corporate rate to 15 percent would reduce federal revenue by $673 billion from 2025 to 2034 on a conventional basis. After factoring in positive economic feedback on federal revenues, the proposal would reduce revenue by about $460 billion over 10 years. In 2034, revenue would fall by $75 billion on a conventional basis but by a smaller $40 billion on a dynamic basis.

The revenue loss of moving to a 15 percent corporate rate would raise the debt-to-GDP ratio from 201.2 percent in 2065 to 202.6 percent on a dynamic basis, 1.4 percentage points higher than the baseline scenario.

Table 2. Revenue Effects of Reducing the Corporate Rate to 15 Percent (Billions)

Source: Tax Foundation General Equilibrium Model, July 2024.

A lower corporate tax rate would boost incomes by increasing the after-tax return on investment for owners of corporate equities, which include a large swath of Americans across all income levels, and by lifting worker wages as capital investment lifts productivity. On average, after-tax incomeAfter-tax income is the net amount of income available to invest, save, or consume after federal, state, and withholding taxes have been applied—your disposable income. Companies and, to a lesser extent, individuals, make economic decisions in light of how they can best maximize their earnings. would rise by 0.8 percent on a conventional basis and by 1.1 percent on a dynamic basis.

Table 3. Distributional Effects of a 15 Percent Corporate Tax Rate (Percent Change in After-Tax Income)

Note: Income thresholds are in 2024 dollars and are determined by AGI with an adjustment for household size.

Source: Tax Foundation General Equilibrium Model, July 2024.

A 15 percent corporate rate would be pro-growth, but it would not address the structural issues with today’s corporate tax baseThe tax base is the total amount of income, property, assets, consumption, transactions, or other economic activity subject to taxation by a tax authority. A narrow tax base is non-neutral and inefficient. A broad tax base reduces tax administration costs and allows more revenue to be raised at lower rates. . Currently, businesses cannot fully recover their investment costs, as they must amortize R&D expenses over five (or 15) years, and bonus depreciation is beginning to phase out. These investment penalties will blunt any positive effects of a corporate rate reduction, repeating a mistake from past tax reforms.

If policymakers prioritized improving the tax base by making expensing for short-lived assets and R&D expenses permanent, it would generate more growth and less revenue loss than a lower corporate tax rate: long-run GDP would rise by 0.5 percent and employment by 106,000 full-time equivalent jobs, while tax revenue would fall by $561 billion conventionally and $326 billion dynamically. The long-run cost would be minimal on a conventional basis, as expensing primarily changes the timing of deductions, and it would slightly raise revenue on a dynamic basis.

Lowering marginal tax rates on investment, as would occur under Trump’s proposed 15 percent corporate tax rate, would be pro-growth. However, lawmakers should also consider fundamentally improving and simplifying the business tax code via expensing and corporate integration. Raising tariffs to pay for tax cuts, on the other hand, would be counterproductive, introducing more distortions and economic drag. Pro-growth tax reform can and should be achieved in a fiscally responsible manner, setting the federal government on a more stable and sustainable fiscal trajectory while boosting American competitiveness.

Share this article