Unless they run a big corporation, Americans might be tempted to shrug at Vice President Kamala Harris’s proposal to raise the corporate-income-tax rate from 21 percent to 28 percent.
But corporations don’t pay taxes. People do. Harris’s proposed tax hike would come out of the pockets of consumers, workers, and investors who own stock — even if indirectly through a retirement account.
The corporate-income tax is one of the most economically damaging taxes there is. When Congress last reduced the corporate-income-tax rate, companies responded with a wave of investments, pay increases, and employee bonuses.
How and why do corporate taxes affect workers and families? Consider what would happen to a company — let’s call it XYZ Corp. — if the U.S. dramatically hiked taxes on corporate profits.
XYZ might first try passing the tax hike along to its customers. But its ability to do so would be limited because its foreign competitors who also sell in the U.S. would be unaffected by the tax hike.
XYZ might instead consider relocating some of its operations out of the U.S. to avoid the extra taxes. It might move manufacturing jobs from the Midwest to Mexico, and it might move corporate jobs from Dallas to Dublin. The more XYZ could shift production out of the U.S., the less the U.S. corporate tax would affect it.
This means American job losses. Because of the reduced demand for labor in the U.S., XYZ and other employers nationwide would absorb some of the tax hike by scaling back wage increases, bonuses, and benefits for their employees.
The company’s stock value would drop as its expected stream of after-tax profits dwindled. The company would be left with less profit to distribute to its shareholders, to mutual funds, and to pension funds. Americans — especially retirees — would therefore have less wealth.
Some businesses wouldn’t survive a major increase in taxes. The outflow of capital from the U.S. and the shuttering of U.S. businesses would reduce innovation, so many products and technologies would be delayed or never developed. Lower wages and higher joblessness would lead more American families into welfare dependence and all the societal ills that come with it.
If a tax causes as much harm as the corporate tax, one would at least hope that it would be effective at raising revenue. Unfortunately, the corporate tax is one of the less effective taxes for that purpose, precisely because it’s so economically harmful.
This becomes clear when you look at the effect of the last major change in the U.S. corporate income tax, the reduction in the rate from 35 percent to 21 percent in 2017.
In 2023, corporate-tax revenues were $420 billion, which is 40 percent higher than the $297 billion figure recorded in the last year before the tax cut. The actual corporate-tax revenues for 2023 were 6 percent higher than what the Congressional Budget Office in 2017 had forecast they would be before the tax cut came into effect. The increased economic activity from corporate-tax cuts also bolsters receipts from taxes on investment and individual income as people make more money.
In the ten years before the 2017 tax cuts — a period during which the U.S. had the highest or second-highest corporate-tax rate in the developed world — corporate-tax revenues fell by 20 percent, and the government consistently recorded corporate-tax revenues below government forecasts.
A large corporate tax hike won’t fix the federal budget. But there’s every reason to think that it would harm economic growth and put Americans out of work. If Harris wins, she would be foolish reverse the progress that Republicans made in 2017 in reducing the corporate-tax rate. If Trump wins, he should press for further cuts to this especially destructive tax.
