Congress faces a major “tax cliff” in 2025 with the expiration of the individual components of the 2017 Tax Cuts and Jobs Act, otherwise known as the Trump tax cuts. This year’s elections will largely determine the fate of trillions of dollars in tax cuts and the course of policy for years to come. At stake are individual tax rates, the doubled standard deduction, the enlarged child tax credit, the new tax break for businesses that file as individuals, and the increased exemptions for the estate tax. The Washington Examiner is featuring a series this week on key considerations for this major tax battle. This first entry explores how the corporate tax rate is likely to turn into a major item of negotiation.
Next year is likely to see the biggest battle over the taxation of corporations in nearly a decade, a multifront engagement that will pit free marketers and big business against Democrats and populists .
The corporate tax rate is set to be a point of negotiation in a historic “fiscal cliff” scheduled for next year, when the individual portions of the Trump tax cuts expire.
The 2017 Republican tax overhaul lowered the corporate tax rate from 35% to 21% — and unlike the changes made to individual and estate tax, that cut is permanent in law. Yet the rise of populism in the United States and the demands of international tax competition have coincided to cast doubt on the stability of corporate taxation. Accordingly, the outcome of the 2024 elections and control of the White House, the House of Representatives, and the Senate will determine how the corporate tax rate is altered in broader talks about taxation and spending.
It was Republicans who lowered the rate, but now different factions of the party might seek to change it.
Former President Donald Trump, campaigning to retake the White House, has said he’d like to lower it to 15% as a way to encourage greater investment by corporations. Generally speaking, it’s not too hard to get post-Reagan era Republicans to go along with the idea of tax cuts, and Trump wouldn't face much resistance within the party in trying for a lower rate.
Yet the past few years have seen the rise of populist Republicans who bristle at multinational corporations as woke and unpatriotic. Some in Congress have gone so far as to suggest that the corporate tax rate should rise as part of any major fiscal bargain. Trump’s own running mate, Sen. J.D. Vance (R-OH), has previously said he wouldn’t favor a further reduction in the tax rate.
Meanwhile, leading Democrats also favor raising the rate. Vice President Kamala Harris has not sketched out her campaign agenda, but the Biden administration has proposed raising it to 28%. Left-liberals, on the other hand, have sought rates even higher. But a Democratic call for a return to the highest tax rates in the developed world would risk sapping business support and could hurt the party among the higher-income brackets that have embraced it in recent years.
Major business interests, meanwhile, would be glad simply to emerge through 2025 unscathed.
“We are looking to retain the current rate because we think it's been working,” said Catherine Schultz, the vice president for tax and fiscal policy at the Business Roundtable, a group of CEOs of major corporations.
Schultz told the Washington Examiner that the 2017 overhaul was a success in that corporate tax receipts have been higher than they were before the rate cut. She also noted that in the intervening years, there have been no corporate “inversions” — that is, instances in which U.S. companies merge with smaller firms in low-tax jurisdictions and then place the combined company’s headquarters in the lower tax locale. Such transactions became popular in the early 2010s as a way to avoid some U.S. taxes.
The threat of corporate inversions was the prime motivating factor behind the 2017 tax reform effort. In fact, the Obama administration, in its later years, had tried to negotiate with congressional Republicans to lower the corporate tax rate to discourage companies from trying to move their headquarters overseas.
With unified GOP control of the White House and both chambers of Congress, Republicans were able to push through a sweeping revision of the tax code that included not just the corporate tax rate cut but also an overhaul of the system of international taxation. That part of the tax law included added incentives for companies that make money off of intellectual property and thus could easily relocate abroad, such as drugmakers and tech firms. Now, if those firms stay in the U.S., they effectively get a lower tax rate on their IP income. But if they try to assign that income to tax havens artificially, they face new penalties.
President Joe Biden came into office pledging to repeal the Trump tax cuts and raise the corporate tax rate. He hasn’t been successful in doing so, in large part because he never had a Senate majority that favored tax hikes, thanks in large part to resistance from centrist Sens. Joe Manchin (I-WV) and Kyrsten Sinema (I-AZ), both of whom left the Democratic Party.
Yet the Biden administration has taken steps generally to move in the direction of greater corporate taxation. The 2022 Inflation Reduction Act passed by Democrats enacted a minimum tax rate of 15% on corporations’ “book income” — that is, the income they report to investors rather than what they report to the IRS. The Biden administration also led negotiations to secure agreements from 130-plus countries to implement a minimum corporate tax rate of 15%. In theory, that agreement should reduce tax competition and make it unnecessary for the U.S. or other countries to lower its business tax rate in order to keep companies from fleeing.
In the most recent White House budget proposal, Biden asked Congress to raise the headline corporate tax rate to 28%. Raising the rate to that degree would reduce long-run GDP by 0.6%, according to an estimate by the Tax Foundation, a think tank that generally prefers lower taxes.
Republicans generally would reverse those Biden efforts. Lowering the corporate tax rate, though, would be a tall order, in part because it would entail significant losses to the Treasury — $935 billion over the next decade, according to the Tax Foundation.
Lowering the corporate rate to 15%, as Trump has suggested, would slash federal tax revenue by $673 billion from 2025 through 2034. Such a change would boost GDP by 0.4%, according to the same group.
The idea of adding to the deficit is likely to make some conservatives blanch — especially those opposed to corporate tax rate cuts for populist reasons.
“I think there is obviously a huge fiscal crisis, and conservatives are recognizing that we’re going to need to do something about it. And so, in general, I think there is a much greater openness to considering raising revenue than there has been in the past, and then the question is: Where should that come from?” said Oren Cass, the chief economist of American Compass, a conservative group that favors more a more skeptical approach to big business.
Cass said a 25% rate “makes sense.”
Rep. Chip Roy (R-TX), one of the most conservative members of Congress, said recently that he would consider raising the corporate rate as part of a deal to extend the individual tax cuts. “I’d like to see corporations getting with the program and saving America instead of just looking at their bottom line,” he told Politico.
More broadly, Republican willingness to aid large corporations in their policy goals has ebbed since 2017, as big business has sided against conservatives in certain high-profile culture war battles — such as when some corporations pressured MLB into moving the 2021 All-Star Game out of Atlanta in retaliation for the state’s new election law.
Sen. Thom Tillis (R-NC), has also indicated openness to seeing the corporate tax rate go up.
“That's a huge red flag for us, and obviously, it would certainly be self-defeating,” Watson McLeish, the senior vice president for tax policy at the U.S. Chamber of Commerce, said about the lawmakers who might pitch raising the corporate rate to pay for other tax priorities.
The vast majority of Democrats would be glad for such a hike to be part of talks. With Manchin and Sinema leaving office after this year, there will be few legislators who caucus with Democrats opposed to rate hikes. Lawmakers such as Sen. Elizabeth Warren (D-MA), who has said that raising corporate taxes is a “red line” in negotiations, will have relatively more sway within the caucus.
“It's certainly possible that many Democrats will want to return to the full 35% rate from pre-TCJA,” said Joe Hughes, a senior policy analyst at the left-of-center think tank Institute on Taxation and Economic Policy.
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Hughes countered the argument that raising rates would hurt growth by noting that many corporations pay very low effective tax rates by taking advantage of various credits and deductions. “We definitely have a lot of corporations like Amazon, like Verizon, like T-Mobile, huge extremely profitable corporations that are paying a lower effective tax rate than a nurse or a firefighter,” he said.
The bottom line is that the 21% corporate tax rate might be settled as a matter of law but not as policy. It could end higher — or lower, depending on how talks develop. After all, that is what happened in 2017, when the GOP bill was amended in a late stage of legislation to raise the corporate rate from 20% to 21% to offset the cost of other provisions.
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