As the race for president in 2024 gets under way, candidates are starting to make plans for how they would handle taxes. Getting the government corporate tax rate down from 21% to 15% is a tax plan that both former President Donald Trump and former Vice President Mike Pence supported.
A business tax rate of 15% would make the U.S. more competitive and help the economy grow. But politicians and candidates should change tax rates along with changes to the tax base. This way, the cost of tax cuts will be covered, investments won't be hurt, and bigger tax reform won't be ruled out.
The U.S. company tax rate was lowered from 35% to 21% by the Tax Cuts and Jobs Act (TCJA) of 2017. The lower tax rate was part of a bigger plan to change the U.S.'s tax system from one that taxes profits everywhere they are made to one that only taxes profits made in the U.S.
The changes made the U.S. more competitive by lowering the combined corporate rate from 38.9 percent in 2017—which was the highest rate in the OECD at the time—to 25.8 percent by 2023. The U.S. rate is now just below the OECD weighted average of 26.2 percent and just above the OECD simple average of 23.5 percent.
The current rate of corporate tax gives room for more progress that would make the U.S. more competitive. The combined U.S. rate would drop to 20.1% if it was lowered to 15%. This is just above Estonia's combined rate of 20%. Only Hungary, Ireland, and Luxembourg in the OECD would have a company tax rate that is much lower than the U.S.
Making the U.S. more competitive on the world stage will make it a more appealing place for businesses to spend. This will create more jobs for Americans and make companies less likely to move their operations overseas.
Table 1. OECD Countries’ Combined Corporate Tax Rates Compared to U.S. under Current Law and a 15% Corporate Tax Rate
| Country | Combined Corporate Rate, 2023 |
|---|---|
| Colombia | 35.0% |
| Republic of Korea | 31.5% |
| Australia | 30.0% |
| Costa Rica | 30.0% |
| Netherlands | 30.0% |
| Germany | 29.9% |
| Japan | 29.7% |
| Norway | 28.0% |
| Italy | 27.8% |
| Chile | 27.0% |
| Latvia | 26.5% |
| Canada | 26.2% |
| OECD Weighted Average Excluding the U.S. | 26.2% |
| France | 25.8% |
| New Zealand | 25.8% |
| United States (Current Law - 21%) | 25.8% |
| Belgium | 25.0% |
| Spain | 25.0% |
| United Kingdom of Great Britain and Northern Ireland | 25.0% |
| Mexico | 24.9% |
| Austria | 24.0% |
| OECD Simple Average Excluding the U.S. | 23.5% |
| Israel | 23.0% |
| Denmark | 22.0% |
| Greece | 22.0% |
| Poland | 22.0% |
| Slovakia | 21.0% |
| Sweden | 20.6% |
| United States (Under a 15% Federal Corporate Rate) | 20.1% |
| Estonia | 20.0% |
| Finland | 20.0% |
| Iceland | 20.0% |
| Lithuania | 20.0% |
| Turkey | 20.0% |
| Switzerland | 19.7% |
| Czechia | 19.0% |
| Portugal | 19.0% |
| Slovenia | 19.0% |
| Luxembourg | 15.0% |
| Ireland | 12.5% |
| Hungary | 9.0% |
Source: OECD, “Table II.1. Statutory corporate income tax rate”; Author calculations.
Lessening our dependence on corporate taxes to bring in money would help the economy and make us more competitive on the world stage. We used the Taxes and Growth model to come up with our estimates. A 15% company tax rate would lead to a 0.5% rise in long-term GDP, a 0.4% rise in wages, and the creation of about 91,000 full-time equivalent jobs. Economic study has shown over and over that corporate taxes are one of the worst ways to raise money because they discourage investment and lower workers' long-term wages.
Table 2. Long-Run Economic Effects of Reducing the Corporate Tax Rate to 15 Percent
| Gross Domestic Product (GDP) | +0.5% |
|---|---|
| Gross National Product (GNP) | +0.5% |
| Capital Stock | +0.9% |
| Wages | +0.4% |
| Full-Time Equivalent Jobs | +91,000 |
Source: Tax Foundation General Equilibrium Model, October 2023.
In a normal year, lowering the company tax rate to 15% would mean less money coming into the federal government from 2024 to 2033, or $522 billion. This is assuming that the change starts in 2025. The plan would cost about $377 billion over 10 years, when good economic feedback on federal revenues is taken into account. If you use the old method, income would drop by $62.4 billion in 2033. If you use the dynamic method, it would only drop by $35.4 billion.
If corporations switched to a 15% rate, they would lose money. As a result, the debt-to-GDP ratio would rise from 237.1% in 2065 to 240.8% in a normal year. The debt-to-GDP ratio goes up to 238.1%, which is one percentage point higher than the average ratio, when the good effects of the lower rate on the economy are taken into account.
Table 3. Revenue Effects of Reducing the Corporate Rate to 15 Percent (Billions)
| 2024 | 2025 | 2026 | 2027 | 2028 | 2029 | 2030 | 2031 | 2032 | 2033 | 2024-2033 | |
|---|---|---|---|---|---|---|---|---|---|---|---|
| Conventional | $0.0 | -$63.5 | -$55.4 | -$59.2 | -$58.9 | -$43.1 | -$55.1 | -$55.9 | -$58.6 | -$62.4 | -$522.0 |
| Dynamic | $0.0 | -$59.0 | -$47.6 | -$48.1 | -$45.3 | -$36.7 | -$36.2 | -$34.1 | -$34.3 | -$35.4 | -$376.8 |
Source: Tax Foundation General Equilibrium Model, October 2023.
Everyone's income would go up after taxes if the company tax rate was 15%. According to the usual rules, the incomes of the bottom 20% of families would rise by 0.8%. It would increase their long-term wages by 1.2% when economic growth is taken into account. If income goes up by, say, 2% for the top 1% of families, after taxes incomes would go up even more.
A lower corporate tax rate would boost incomes by boosting investment, wages, and jobs. It would also boost the after-tax return on investment for people who own company stocks, which is a big group of Americans from all income levels. Workers would get paid more because at least half of the taxes that companies have to pay are actually paid for by workers, not by people who own stock in the companies.
Table 4. Distributional Effects of a 15 Percent Corporate Tax Rate (Percent Change in After-Tax Income)
| Percentile | Conventional, Long-Run | Dynamic, Long-Run |
|---|---|---|
| 0% to 20% | 0.8% | 1.2% |
| 20% to 40% | 0.7% | 1.1% |
| 40% to 60% | 0.7% | 1.1% |
| 60% to 80% | 0.7% | 1.1% |
| 80% to 100% | 1.2% | 1.6% |
| 80% to 90% | 0.8% | 1.2% |
| 90% to 95% | 0.9% | 1.3% |
| 95% to 99% | 1.1% | 1.5% |
| 99% to 100% | 2.0% | 2.4% |
| Total | 1.0% | 1.4% |
Source: Tax Foundation General Equilibrium Model, October 2023.
A 15% corporate tax rate would make the U.S. more competitive and boost economic output, but candidates and lawmakers should also keep in mind that we also need a good corporate tax base. At the moment, businesses can't fully collect the cost of their investments because they have to spread out R&D costs over five (or fifteen) years, and bonus depreciation is being phased out. These investment penalties will cancel out any good benefits of lowering the corporate tax rate, which is the same mistake that was made in previous tax reforms.
Along with addressing the TCJA-related business tax increases, policymakers should think about including changes to the corporate tax rate in a larger reform package that makes sure taxes don't hurt investment, treats businesses the same no matter what legal form they are in, and increases the tax base. This will ultimately put the federal government on a more stable and sustainable fiscal path.
