Lower wages, higher prices, and fewer job opportunities await the U.S. should President Biden succeed in his corporate tax increase scheme.
Biden wants to take the current corporate tax rate of 21% and raise it to 28%. This is a 33% increase which will saddle our employers with a higher corporate tax rate than China and impose the second highest corporate tax rate in the developed world.
The corporate income tax is embedded in the cost of goods and services. Biden’s tax hike will raise costs for households. One major example is the cost of utility bills – electric, water, and gas. Public utility companies are in fact required to build the cost of taxes into their rates.
When the Tax Cuts and Jobs Act reduced the tax from 35% to 21%, Americans for Tax Reform documented more than 300 examples of utilities passing tax savings down to customers. Households and small businesses are people already struggling with the aftershocks of Biden inflation as prices have risen by 17.4 percent.
Corporate income tax hikes also hurt wages. Even back in 2012, a report by the University of Oxford found that a $1 increase in the corporate tax reduces wages by 92 cents in the long term. The rise in prices for goods and services leads to a 4 percent decline in real wages and benefits.
When the TCJA was signed in 2017 by President Trump, it significantly lowered the corporate rate from 35% to 21% it stimulated economic growth, investments, and job creation.
To put the TCJA into perspective, the long-run positive effects expected from the TCJA, including increases in investment, output, and wages, “are entirely due to the reduction in the corporate tax rate.” The benefits of this lower rate include increased investment in America, leading to higher demands for labor, increased productivity, and higher wages. A recent study with the National Bureau of Economic Research and the Treasury Department find the reforms raised U.S. capital investment and boosted economic growth.
It is arguable that Biden’s tax rate increase to 28% will be more damaging to American enterprise than the pre-TCJA 35% since several provisions broadened bonus depreciations too 100% and Qualified Business Income (QBI) deductions to 20%. If Biden’s plan succeeds, businesses will suffer exponentially more.
The president of Americans for Tax Reform, Grover Norquist, raises an important question, asking: “Why does Biden want to damage American competitiveness and job creation?” On the global stage, a surge in the corporate tax rate would render the nation less competitive, especially since the European average stands at 21% and China has a 25% rate.
The U.S. should be more more competitive compared to other countries, attracting foreign investments and expansions of domestic businesses, both of which contribute to a more dynamic economy. If businesses begin to seek more favorable tax environments, corporations will relocate, eroding America’s competitive edge.
Innovation and research endeavors will take a hit in the event of a tax increase. A 2023 paper in the American Economic Review: Economic Policy highlights empirical evidence that corporate tax cuts “do have a positive impact on corporate innovation.” In response to a higher corporate tax, companies will curtail investments in groundbreaking technologies, jeopardizing the U.S. position at the forefront of global advancements. As the Cato Institute suggests, the 28% rate would “discourage taking innovative projects, which are typically more risky” as businesses would have a lower debt threshold with less disposable income.
Relocating corporations and decreased innovation are not the only problems the U.S. will face. According to various studies, economists have concluded that corporate taxes conventionally reduce efficiency in the workforce and place undue burdens on lower-wage workers.
The Tax Foundation confirms that the people who would endure the worst of the corporate tax increase would be “young workers, the low-skilled, and women,” typically groups that are already facing significant barriers to working. In fact, JCT Chief of Staff Thomas A. Barthold stated before a Ways and Means Committee hearing in 2022 that “25% of the burden of the corporate tax may be borne by labor in terms of diminished wage growth.”
Alarmingly, Biden’s tax hike would negatively affect the small enterprises he claims to be the “engine of our economy” the most. The National Federation of Independent Business (NFIB) has highlighted the positive impact of the TCJA on small businesses, emphasizing how the lower tax rate has benefited their operations. But the Biden corporate tax rate hike will increase costs, leading these businesses to face closures and eliminations of crucial job opportunities including entrepreneurial growth. In fact, 20% of c-corps are small businesses.
Further, these businesses will transfer the burden to consumers through elevated prices curbing consumer spending and putting a damper on economic activity. The tax hike would effectively perpetuate a cycle of financial strain on American consumers.
As President Biden continues to threaten the positive effects of the TCJA with the corporate tax rate increase, American liberty is at risk. The policy itself undermines the principles of free-market competition, innovation, and investments. The increase will also jeopardize smaller businesses and American consumers with tax burdens they cannot afford. Biden should reevaluate the implications of his harmful tax policies before drastically impacting American enterprise.
Rachel Loren is a Policy Associate at Americans for Tax Reform