Former President Donald Trump has proposed a reduction in the federal corporate tax rate from 21 percent to 15 percent if reelected. While this move could potentially stimulate growth, it would also decrease federal tax revenue at a time when debt and deficits are already unsustainably high. This could potentially limit other pro-growth tax changes that lawmakers may consider in 2025.
The 2017 Tax Cuts and Jobs Act (TCJA) permanently reduced the US corporate tax rate from 35 percent to 21 percent. This was part of a larger tax reform aimed at shifting the US from a worldwide system of taxing profits to a territorial system focused on profits earned in the US. The reforms boosted US competitiveness, lowering the combined corporate rate from 38.9 percent in 2017 to 25.8 percent as of 2023.
A lower corporate income tax rate could make the US a more attractive location for business investment, creating economic opportunities for American households and reducing incentives for businesses to move operations or profits overseas. However, it would also reduce federal revenue by $673 billion from 2025 to 2034 on a conventional basis. After factoring in positive economic feedback on federal revenues, the proposal would reduce revenue by about $460 billion over 10 years.
Despite the potential for growth, a 15 percent corporate rate would not address the structural issues with today’s corporate tax base. Businesses cannot fully recover their investment costs, as they must amortize R&D expenses over five (or 15) years, and bonus depreciation is beginning to phase out. These investment penalties will blunt any positive effects of a corporate rate reduction, repeating a mistake from past tax reforms.
Lowering marginal tax rates on investment, as would occur under Trump’s proposed 15 percent corporate tax rate, would be pro-growth. However, lawmakers should also consider fundamentally improving and simplifying the business tax code via expensing and corporate integration. Pro-growth tax reform can and should be achieved in a fiscally responsible manner, setting the federal government on a more stable and sustainable fiscal trajectory while boosting American competitiveness.