Exploring the Future of Tax Reform and Economic Growth
As the sunset of the Tax Cuts and Jobs Act (TCJA) looms, the United States Congress faces a formidable task: how to maintain tax benefits and a growth-oriented tax system without exacerbating federal debt. The TCJA, which is set to expire at the end of 2025, has significantly reformed individual, estate, and business taxes. Extending these changes without offsets could lead to a $4 trillion reduction in tax revenues over the next decade.
The Tax Foundation’s latest research presents two options that could serve as a blueprint for lawmakers. These options aim to broaden the individual income tax base beyond the scope of TCJA, preserve individual rate cuts, enhance the business tax base to encourage investment, eliminate industry-specific tax credits, and maintain the corporate tax rate at 21 percent. This approach aligns with the goal of fostering economic growth while being fiscally responsible.
However, there are concerns regarding proposals that suggest increasing the corporate income tax rate as a means to fund the continuation of TCJA’s provisions. Studies indicate that corporate income tax is particularly detrimental to economic growth. Conversely, evidence suggests that reducing corporate income tax rates can significantly boost domestic investment. With the current top combined marginal rate on corporate income at 25.6 percent, including state rates, it already exceeds the OECD average.
For a robust economy, a simplified tax code, and fiscal prudence should be at the forefront of tax policy discussions. Policymakers aiming for revenue-neutral reforms should consider less harmful methods such as base broadening and ending distortive tax expenditures. These measures could simplify compliance and administration while minimizing economic distortions.
An analysis using the Tax Foundation’s General Equilibrium Model compares the economic impact per dollar of revenue raised through various tax increases. The findings suggest that increasing the corporate income tax rate by 4 percentage points to 25 percent would be more economically damaging than broadening the individual income tax base or increasing the gas tax.
As debates over tax policy continue, it is clear that raising the corporate tax rate is not a viable solution for pro-growth, deficit-neutral reform. Instead, lawmakers must make challenging yet crucial decisions to ensure that inc taxes support a thriving economy without contributing to further debt.
