Should we raise corporate taxes?

Today’s post topic is: Should we raise corporate taxes?

Corporate taxes are levied on company profits: what’s left after expenses like wages, rent, and investment. In the US, the federal rate is 21%, which is similar to the EU average.

Supporters of higher corporate taxes offer two main arguments. First, it could bring in more revenue. The US collects relatively little corporate tax as a share of GDP. Second, fairness: many corporations pay lower effective tax rates than middle-income workers, raising equity concerns.

But raising corporate taxes comes with tradeoffs. Higher rates can discourage investment, reduce hiring, or push companies to raise prices. Economists generally agree that part of the burden falls on workers through lower wages or fewer jobs because lower after-tax profits can make firms less interested in growth. Some companies may even shift operations abroad, shrinking domestic job opportunities.

It’s also harder to raise corporate taxes when capital is very mobile, like in the US, and companies can move profits to tax havens or shift operations overseas. That’s why global coordination, like the recent push for a minimum corporate tax, is important.

Corporate taxes also create some double taxation: profits are taxed at the corporate level, and again when distributed as dividends or capital gains. This raises the total tax burden on investment and saving.

So what’s the alternative?

Instead of raising the headline rate, we should focus on closing loopholes. Loopholes reduce revenue and distort business decisions. For example, some firms shift profits to low-tax countries using internal pricing tricks or deduct massive stock-based compensation. Certain industries, like oil and gas, get special tax breaks with little justification. These tax breaks benefit narrow groups while hurting overall efficiency.

A better system would broaden the base, close inefficient loopholes, and ensure that large profitable firms pay at least a minimum tax. That approach raises revenue with fewer distortions, and without discouraging investment or growth as much as rate hikes might.

Originally published at https://mytwocentsandcounting.substack.com.