Why Does the U.S. Maintain a 35% Corporate Tax Rate?

The United States has maintained a 35% corporate tax rate, which is one of the highest in the world. But why does it stay at this rate despite economic pressures and ongoing calls for reform?

The Economic Rationale Behind the High Corporate Tax Rate

The primary reason for the high corporate tax rate is to generate significant revenue for the government. With a 35% tax rate, the government can collect substantial amounts of money from companies, which is then used to fund public services, infrastructure, and social programs.

However, this high rate has not gone without challenge. The global trend towards lower corporate tax rates has made the U.S. less competitive in terms of attracting and retaining business investments. Countries like Ireland and Switzerland boast significantly lower rates, making it economically advantageous for businesses to relocate or expand operations abroad.

The Politics of Plunder: Governing with Corporate Tax Targets

The term 'politics of plunder' aptly describes the complex and often contradictory motivations behind the current corporate tax rate. On one hand, higher taxes on corporations can lead to significant financial gains for the government, which can then be used to fund various social and economic initiatives. On the other hand, a higher tax rate risks putting the U.S. at a disadvantage in a global economy where tax competition is intense.

Furthermore, the U.S. political landscape makes it difficult to alter the tax rate. This is because any attempts to lower the rate would face significant opposition from different factions of Congress. There are two primary barriers to lowering the corporate tax rate:

Option 1: Cut the Rate and Increase the Deficit

One option is to reduce the corporate tax rate while simultaneously increasing the national deficit. This would require an increase in public sector borrowing, which Congress may not be willing to support due to concerns about national debt. Higher deficits could also lead to increased borrowing costs and reduced fiscal flexibility in the future.

Option 2: Tax Reforms to Ensure Revenue Neutrality

The second option is to lower the corporate tax rate but ensure that total tax revenues remain unchanged. This could be achieved by eliminating tax favors or loopholes for powerful business lobbies. However, this option is also fraught with political challenges, as powerful industries and their lobbyists would strongly oppose any changes to existing tax advantages.

Political Considerations and Future Reforms

Another significant factor is the political will of Congressional Democrats. They are often reluctant to eliminate existing tax benefits for the sake of revenue-neutral reform, especially when these benefits can potentially be reintroduced at a later date to finance programs like universal pre-K or other social initiatives. This kind of future-proofing is a significant challenge for any proposal to lower the corporate tax rate.

In conclusion, the 35% corporate tax rate continues to exist due to a complex interplay of economic, political, and social factors. While the current rate brings in substantial revenue for the government, it also comes with a cost in terms of business competitiveness. The ongoing debate revolves around how to balance these competing interests without resorting to politically unpalatable solutions.