The upcoming 2024 US election could potentially bring changes to the current corporate tax rate of 21 percent. This rate was established through the 2017 tax reform, aligning the US rate with other developed countries and ending its status as the highest. The debate surrounding the corporate tax rate has profound implications for businesses planning their future investments, causing uncertainty in the short term and impacting project viability in the long term.
Potential rates proposed by former President Donald Trump (20 percent or 15 percent) and current Vice President Kamala Harris (28 percent, previously reaching 35 percent) would have vastly different effects on the economy. An analysis conducted using the Tax Foundation’s General Equilibrium Model revealed that a rate increase to 35 percent could shrink the US economy by almost 1.4 percent and reduce employment by 289,000 jobs. Conversely, lowering the rate to 15 percent would lead to a minimal economic growth of slightly over 0.4 percent.
The next US president will face challenging decisions regarding tax policy, especially with the expiration of the 2017 tax reform provisions in 2025. Extending these provisions would result in a revenue reduction exceeding $4 trillion, compounding the existing federal budget’s unsustainable trajectory. Despite the need for increased revenue, implementing damaging tax hikes is not the solution.
Studies have consistently shown that the corporate income tax is detrimental to economic growth. Recent analyses reaffirm the benefits of reducing corporate income tax, emphasizing the positive impacts the TCJA’s reforms had on domestic investment. Policy-makers must consider the repercussions of even minor increases in the corporate tax rate, as they have a considerable impact on economic output.
Although a higher corporate tax rate may generate revenue, it comes at the expense of reduced economic output, investment, and wage growth. Instead of resorting to economically harmful tax hikes, lawmakers should focus on eliminating inefficiencies and broadening the tax base to increase revenue.
The TCJA’s successful reduction of the corporate tax rate positioned the US as a more attractive investment destination. Future changes to corporate taxes should prioritize incentivizing investment and innovation, ruling out a higher corporate tax rate as a revenue-raising measure. Emphasizing cost recovery improvements can further enhance incentives for businesses to invest and innovate, driving economic growth sustainably.
In conclusion, maintaining a competitive corporate tax rate is crucial for fostering economic growth and attracting investment. By focusing on efficient tax policies that promote investment and innovation, lawmakers can ensure sustainable economic development while generating necessary revenue. Stay informed on tax policies impacting you by subscribing to insights from our trusted experts.
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