Less than five months away from the November election, U.S. President Biden and former President Trump are once again targeting corporate tax issues in an attempt to appeal to a broader spectrum of voters. However, their strategies are vastly different – one aiming to increase taxes while the other seeks to decrease them, both of which would have significant impacts on corporate profits, investments, and federal tax revenues.
If Biden and the Democratic Party win big in November, the corporate tax rate could potentially increase from the current 21% to 28%. Conversely, if Trump and the Republican Party regain full control after the election, the corporate tax rate could be reduced to 20% or even 15%.
Every percentage point change in the corporate tax rate results in over $130 billion in tax revenue over a decade, and an 8-percentage point difference would create a tax revenue gap exceeding $1 trillion. This has piqued the interest of the U.S. business sector and Wall Street in the election outcome.
The Business Roundtable, representing over 200 CEO members of the largest U.S. companies, is planning an eight-figure lobbying campaign to support maintaining at least a 21% corporate tax rate and extending international tax provisions set to expire at the end of next year.
Trump secured a tax cut victory during his first presidential term. In 2017, many businesses advocated for reducing the U.S. corporate tax rate from 35% to 25% to bring it down from the highest among developed economies to a middle-range level. With the Tax Cuts and Jobs Act passed just before Christmas in December 2017, Trump and the Republican Congress lowered the tax rate to 21%.
Given that most provisions of the 2017 tax cut bill are set to expire by the end of 2025, debates surrounding the corporate tax rate will be among the broader tax policy issues Congress will have to address next year. Unlike other provisions, the 21% corporate tax rate is permanent, while individual income tax rates, child tax credits, state and local tax deductions, pass-through entities’ tax rates, and estate tax exemptions are set to expire.
During last week’s Business Roundtable meeting, former President Trump expressed to business leaders that if he returned to the White House, he would further reduce the corporate tax rate to 20%, while also cutting down on regulations and increasing tariffs to benefit American businesses once again.
Republicans had promised to further lower tax rates and make the tax cut legislation permanent. Within the Democratic Party, raising the corporate tax rate is seen as one of the simpler political choices, as it could provide substantial tax revenue for their other priorities.
After President Biden took office in 2021, the Democrats attempted to raise the corporate tax rate, but the proposed tax increase did not materialize due to the opposition of Democratic-turned-Independent Senator Kyrsten Sinema, keeping the 21% corporate tax rate intact.
Biden’s plan to raise the corporate tax rate to 28% would push U.S. corporations back towards having one of the highest corporate tax rates among major economies.
Democrats argue that the U.S. corporate tax revenue as a share of the economy is lower compared to internationally. White House National Economic Council Director Lael Brainard stated, “From every perspective we look at, we’re not raising enough revenue from the corporate side.”
According to Congressional Budget Office data, corporate taxes are expected to account for around 8% of U.S. tax revenues over the next decade, significantly lower than the revenues from individual income taxes or payroll taxes.
A report by The Wall Street Journal pointed out that a significant portion of U.S. tax revenue from corporations is based on individual tax filings of business owners rather than directly levying corporate taxes, a unique feature compared to many other countries.
Moreover, most of the tax burden for U.S. corporations actually falls on high-income households, albeit the nuances in who ultimately foots the bill. In reality, corporate taxation includes payments made by both the “corporation” and individual “wealthy” owners. Economists and governmental institutions generally believe that shareholders ultimately bear most of the tax burden, with workers and consumers also bearing some of the cost. Generally, shareholders are more affluent than the overall population.
The shareholder group includes pension funds, 401(k) account holders, and some middle-income families. Biden and the Democrats downplay the impact of tax increases on these groups and do not consider raising the corporate tax rate as contradicting Biden’s pledge to shield families with annual incomes below $400,000 from tax increases.
Currently, the focus within the Democratic Party is on companies that have enjoyed lower tax rates only to increase prices later.
Corporate taxes serve as one of the few tax types through which the U.S. can indirectly tax foreign investors, typically targeting foreign investors who invest in U.S. securities and non-profit organizations with substantial tax-exempt donations.
Republicans are seeking to send a long-term signal to companies that their tax cuts can encourage businesses to keep profits and investments in the U.S. rather than redirecting them abroad, allowing companies to receive tax cut benefits.
They point out that since the implementation of the 2017 tax cut bill, no U.S. company has resorted to shifting addresses overseas to avoid taxes. Democrats also acknowledge that the 2017 tax cut bill provided a minor boost to domestic investment and primarily led to wage growth for high-income workers.
Trump told business executives last week that he aims to lower the corporate tax rate to 20%. However, some Republicans aim to go even further, striving to reduce the corporate tax rate to 15%, reaching the lowest corporate tax level since 1935. They believe this would significantly boost corporate profits, reward shareholders, stimulate business growth and job creation, ultimately leading to economic prosperity and increased overall tax revenue.
Republicans caution that raising the corporate tax rate now would harm the economy, as the current circumstances differ from previous years. The 2017 tax cut legislation broadened the tax base by eliminating tax exemptions for industries like domestic manufacturing, meaning a 28% corporate tax rate would entail charging 28% on more people’s personal income.
The Democrats do not necessarily universally support Biden’s proposed 28% corporate tax rate. House Ways and Means Committee Chairman Richard Neal, a Democratic federal congressman, stated that he still prefers the 26.5% corporate tax rate approved by his committee in 2021.
If the Democrats win back the majority in the House of Representatives in this year’s November election, Neal may become the chairman of the House Ways and Means Committee. He believes that for businesses, the actual corporate tax rate is not the most crucial factor.
He said, “The rate is just a number on an advertisement. It’s those deductions and exclusions that often become more important for them.”
Democratic members of the Senate Finance Committee will soon debate the tax rate issue for 2025. Senator Mark Warner stated that he is still observing Biden’s proposed 28% corporate tax rate.
However, he also mentioned, “What’s interesting is, I’ve heard some CEOs advocate for a competitive rate but then complain about our $34 trillion debt.”
According to Treasury Department data, the U.S. national debt currently stands at $34.7 trillion, surpassing $34 trillion for the first time in January this year. While agreeing on the need to address the fiscal situation, the Business Roundtable opposes increasing the corporate tax rate for this purpose.
Jon Moeller, CEO of Procter & Gamble and leading tax and fiscal advocacy policy at the Business Roundtable, told a press conference last Wednesday, “It is the last thing policymakers should be considering to try and address our fiscal condition by increasing corporate taxes because these businesses are creating employment opportunities, maintaining U.S. competitiveness, and making economic prosperity possible. Without these companies, the U.S. cannot achieve economic prosperity.”
On the other hand, Republicans do not have a concrete plan yet. Current House Ways and Means Committee Chairman and Republican federal Congressman Jason Smith stated that some Republicans are open to raising the corporate tax rate.
However, he said, “I won’t get into the number game.”
Congressman Ralph Norman mentioned, “I would want it lower. I don’t care what liberals say. Cutting taxes lets people spend their own money, stimulating our economy.”
Vern Buchanan, Vice Chairman of the Chief Tax Writers Committee and Republican Congressman, believes further tax cuts should be implemented to attract more businesses and investments to the U.S.
Since the 21% corporate tax rate is a permanent provision in the 2017 tax cut legislation, some supportive Republicans suggest that discussing the corporate tax rate now is not a pressing matter. They hope to focus more on provisions set to expire.
Congressman Ben Cline commented, “I’m not for tax increases. I don’t like tax hikes. I don’t support tax hikes, but I think it’s too early to address the issue of the corporate tax rate now; it should not be part of the tax policy conversation.”
Former President Trump outlined the idea of abolishing some personal income taxes while suggesting to compensate for this revenue loss through increased import tariffs during a meeting with Republican lawmakers on Thursday, June 13, on Capitol Hill.
This essentially mirrors the practice during the early days of America’s founding over two centuries ago, with the U.S. then having no personal income tax nor corporate tax, with government finances primarily dependent on tariffs. This spurred rapid economic growth in the U.S.
Currently, tariffs only account for a small fraction of U.S. fiscal revenue, comprising just 1.7% of federal income in the 2024 fiscal year.
Trump’s campaign team has described tariffs as a key feature of their economic strategy, aimed at boosting domestic manufacturing.
Treasury Secretary Janet Yellen criticized Trump’s tariff proposal as unrealistic.
During an interview on ABC’s “This Week” program last Sunday, June 16, Yellen stated, “It would need well over 100 percent tariffs.”
Yellen believes that increasing tariffs would “make it very difficult for working-class Americans to afford” and “damage American businesses.”
Trump also proposed canceling the tip tax to gain support among service industry voters when meeting with Republican lawmakers on Thursday, June 13.
During a large Sunday rally in Las Vegas on June 9, Trump first floated the idea of eliminating tip taxes. Las Vegas boasts a large gambling and tourism industry, with many service workers.
At the time, Trump said, “When I’m President, we will not tax tips, let people keep their tips.”
Following the meeting with Trump last Thursday, Republican lawmakers were enthused about the idea.
Senator Kevin Cramer said, “This tip thing is brilliant, Trump is brilliant. I want to tell you that this is based on a number of studies, this is based on discussions with a server who said, ‘They’re chasing my tip.’”
Senator Shelley Moore Capito shared, “Another senator approached him (Trump) with this is actually engaging with many segments of our labor forces, whether you are a server, a valet, a barista, no matter who you are.”
Capito added, “(Trump) heard the complaints about the government and the way they reformulate tip taxes, and I think he has responded to that.”
Approximately 15.8 million people worked in the leisure and hospitality industry in 2022, largely reliant on tip income, with these jobs typically offering the lowest incomes in the economy.
A Pew survey from last year indicated that 72% of U.S. residents felt that tipping had become more prevalent compared to five years ago.