Should the government raise its tax rate for corporations?
Between the tax rate cuts of the Trump administration and the present-day proposal of the Biden administration to increase them again, the past few years have seen many disagree over the benefits and disadvantages of increasing corporate income tax rates
Rise of the Issue
After the move by President Trump to lower the corporation tax rate from 35% to 21%, Biden’s administration has come forth with a strategy to address economic inequalities by investing in infrastructure, research and development. In order to put this plan into action, Biden proposed that it be in part financed by raising the corporate income tax rate to 28%, and yet another debate on whether raising taxes is an efficient and/or fair strategy sparked again.
This debate sees the two opposing sides having diverging views on whether this would help or hinder the economy, on whether the government should be raising taxes instead of increasing spending, and on whether this would finance necessary public research and infrastructure or instead stifle innovation in the private sector.
Issue Timeline
1894
First Corporate Tax Enacted and Found Unconstitutional
The Wilson-Gorman Tariff Act was the first law to impose a tax on corporate income, but, in Pollock v. Farmers’ Loan & Trust Co., the Supreme Court found the tax to be unconstitutional, as Congress could not tax income.
1913
The Sixteenth Amendment was Ratified
Four years after it passed by Congress, enough states ratified the Sixteenth Amendment, which gave Congress the ability to tax income, including corporate income.
1913
Corporate Taxes Reintroduced
After the passage of the Sixteenth Amendment, Congress used its power to enact the first Constitutional corporate income tax, with the rate set at 1%.
1968
Corporate Taxes Hit All-Time High
The corporate income tax rate reached the highest it has ever been in 1968 at 52.8%.
2017
Corporate Taxes are Most Recently Cut
As part of Donald Trump’s tax plan, a single corporate tax was set at 21%, lowering it from the previous 35%.
Micro Issues
A.
Price Changes
Because corporations would have to pay more in taxes, opponents argue that they would raise prices to make up for lost wages. Proponents of raising corporate taxes argue the market will still control prices and favor those who sell products at the lowest cost.
B.
Investment
Opponents to raising corporate tax rates argue that investment in business would slow down because corporations would be paying additional taxes. Proponents argue that businesses have a financial incentive to make as much money as possible, regardless of the taxation rate, which requires reinvesting.
C.
Government Spending
Proponents of a higher corporate tax argue that it is necessary to fund projects the government wants to take on, while opponents argue that government spending needs to be curbed instead of trying to increase revenue.
Pro Arguments
1.
The government could fund additional programs or pay off debt.
With more money coming in through increased corporate taxes, the government could expand social safety nets and infrastructure programs.
2.
It might not impact the economy negatively in the long run.
Although increasing corporations’ tax rate might slightly slow down the economy in the short term, the investments made with the money could lead to greater economic growth in the long run.
3.
It protects healthy market competition.
By raising taxes on the most profitable corporations, smaller businesses are able to compete in an otherwise hostile market.
4.
It is a way for private companies to financially participate in government-funded research.
Increasing taxes on corporations is a way to make sure that private companies participate in the research and development conducted by the public sphere - such as in education, transportation, or technology for example - from which they benefit as well.
5.
The increased corporation tax rate would still be lower than what it was just a few years ago.
The recent proposals by the Biden administration to increase corporations’ tax rate ask for a rate of 28% - compared to the 35% that existed before Trump’s administration lowered it to its current 21%.
Con Arguments
1.
Higher taxes can lead to lower wages or cutting jobs.
Because companies would be paying more from the profits to the government, they would try to maintain profit margins by either lowering wages of employees or cutting some jobs altogether.
2.
Companies could relocate to countries with lower taxes.
Companies that bring in a lot of money would, rather than staying and paying more in taxes, find a country with a lower tax rate and move their operations there.
3.
Higher taxes would likely require additional spending to enforce and audit.
Instead of increased taxes going toward social or infrastructure programs, money would need to be put into the IRS to enforce and audit new tax laws.
4.
Government needs to spend less, not take in more money.
The government increasingly spends more money every year without providing greater benefits or lowering debts, energy should be focused on lowering the deficit before the government takes more money.
5.
High taxes only hurt struggling small businesses.
Because wealthy businesses are able to hire lawyers and accountants to find loopholes, the small businesses, who often struggle to stay afloat, would be hardest hit by increased taxes.