A Biden administration plan to raise the corporate income tax rate to 28% from 21% would increase the federal-state combined tax rate to 32.34% — the highest level in the Organization for Economic Cooperation and Development (OECD), according to analysis by the Tax Foundation.
The higher corporate tax would undermine long-run economic output by 0.8%, eliminate 159,000 jobs and reduce wages by 0.7%, while increasing the cost of investment and harming U.S. competitiveness, the Tax Foundation said.
"Poorly considered changes to tax policy, including business tax increases, would hamper the economic recovery and limit prospects over the long term," according to the Tax Foundation.
President Biden will "be looking at corporate taxation, closing loopholes, trying to probably raise the corporate tax rate, not as high as it was before 2017, but probably up to 28%," Treasury Secretary Janet Yellen said in an interview on Feb. 22.
In addition to raising the corporate income tax, the Biden administration has considered levying a 15% minimum tax on companies with more than $100 million in book income.
New revenue would go toward economic reconstruction and debt reduction. The U.S. fiscal outlook worsened last year because of the pandemic-induced downturn and $3.5 trillion in pandemic rescue spending.
The federal budget deficit will total 10.3% of gross domestic product (GDP) this year — the second largest since 1945 and exceeded only by the 14.9% shortfall in 2020, according to a forecast by the Congressional Budget Office.
Annual federal deficits will rise to 5.7% of GDP by 2031, increasing U.S. debt to a record 107% of GDP that year, according to CBO projections. Currently, Democratic lawmakers aim to win passage for a $1.9 trillion coronavirus relief package proposed by Biden.
Raising federal revenue by increasing the corporate income tax would impose costs across the economy, the Tax Foundation said.
"President Biden’s proposed tax hike would reduce American economic output during a time when we need to maximize economic growth to reach our country’s pre-pandemic growth trend and return to full employment," according to the Tax Foundation. "Avoiding harmful tax increases and pursuing reform opportunities in corporate taxation should be the areas of focus."
Currently, U.S. corporations face a 21% federal statutory tax rate and an average state statutory rate of about 6%, for a combined rate of 25.8%, according to the Tax Foundation.
"The economic literature shows that corporate income taxes are one of the most harmful tax types for economic growth," it said. "The corporate income tax raises the pretax return firms require to pursue investment opportunities, reducing the pool of investments that firms find worthwhile to pursue," along with economic output, wages and living standards.
An increase in the corporate income tax to 25% from 21% would reduce output by 0.4% and eliminate about 84,000 jobs, the Tax Foundation said, adding that a tax on corporate book income "would likely introduce additional complexity and distortions into the tax code, harm investment incentives and generate relatively little tax revenue."