Should The U.S. Change the Corporate Tax Rate in 2025?
Last Updated February 25, 2025
The 2017 Tax Cuts and Jobs Act (TCJA) included the largest corporate tax cut in U.S. history, bringing the top marginal rate on corporate income falling from 35 percent down to 21 percent. While the reduction brought the U.S. rate in line with peer countries, it was also costly to the fiscal bottom line. At the time of its enactment, the Joint Committee on Taxation (JCT) estimated that the corporate rate cut would reduce revenues by $1.3 trillion between 2018 and 2027.
The corporate rate cut was part of a much larger package of reforms to the tax code (including other reforms to corporate taxation that affected income earned domestically and abroad). While the rate cut was permanent, many other components of the TCJA are expiring at the end of 2025 and therefore under consideration by lawmakers for extension or modification. Some policymakers and economists have discussed further changes to the corporate rate as part of the tax policy discussion this year. As the debate heats up, we revisit why lawmakers lowered the corporate tax rate in 2017, how the lower rate impacted the United States, and how the rate might be reformed in 2025.
Why Did Lawmakers Lower the Corporate Tax Rate?
Prior to enactment of the TCJA, the United States had the second highest corporate tax rate among similarly wealthy countries at 35 percent — behind only France at 44 percent — and calls to lower the corporate tax rate had been long-standing and bipartisan. In 2012, both presidential candidates had proposed lowering the corporate income tax rate by at least 7 percentage points in an attempt to make the United States more competitive. The TCJA brought the corporate tax rate down to about the average of the United States’ peers, which was 23 percent at that time that legislation was enacted. By aligning the tax rate more closely with those of U.S. peers, proponents argued that the law would boost business investment and curb incentives for profit-shifting to lower-tax countries, thereby benefitting the U.S. economy. However, others expressed skepticism that the reduced rate would generate enough of an economic lift to justify its cost.
How Did the Lower Corporate Income Tax Rate Impact the United States?
Assessing the impact of the corporate rate cut — and whether the policy fulfilled its goals — is a necessary step in determining if the corporate tax rate should be revisited in 2025 and, if so, how to adjust the rate. The impact of the rate cut can be analyzed on three fronts: the economy, federal revenues, and how the benefits from the rate cut were distributed amongst taxpayers.
TCJA Impact on the Economy
Prior to enactment of the TCJA, some analyses found that the law would boost economic growth, although such additional growth would not offset the cost of the changes. The Joint Committee on Taxation (JCT) projected that the law as a whole would increase economic growth by 0.7 percent of gross domestic product (GDP) over 10 years. Most of that growth was expected to come from an increase in labor supply (as workers responded to lower individual income tax rates) and more investment (as after-tax returns improved from the lower corporate tax rate, bonus depreciation, and an added tax deduction for certain pass-through businesses). On the higher end of projections, the Tax Foundation estimated an even larger economic effect than did JCT, with an overall increase of 1.7 percent of GDP over 10 years. It projected that the reduced corporate rate would account for an increase in GDP of 2.6 percent over the period; other provisions of the TCJA were found to have no effect on GDP or to reduce GDP.
Assessing the actual economic effects of the TCJA has been difficult and is complicated by several concurrent policies and events, including the COVID-19 pandemic. In a survey of top economists conducted by the Kent Clark Center at the University of Chicago, the number of respondents answering “uncertain” to questions about the economic impact of the TCJA was significantly higher than for other topics. Complicating factors that affected the economy can be limited by focusing analysis on 2018 and 2019, but it would not capture the potential long-term effects that the tax changes might have.
How the TCJA Effected Corporate Income Tax Revenues
Since enactment of the TCJA, corporate tax revenues can be divided into two periods: one with revenues lower than projected (2018–2020) and another with higher than expected revenues (2021–2023). The Congressional Budget Office (CBO) attributed most of the lower-than-expected revenues to the corporate tax cuts in the TCJA, which lowered the effective tax rate paid by corporations.
Revenues from corporate income taxes increased dramatically from 2020 to 2021 and remained at that higher level over the next two years. CBO suggested that those larger revenues were driven by a record-breaking increase in corporate profits, but economists do not agree on what drove those larger profits. Some have pointed to high inflation and pandemic-related spending, while other point to the potential economic effects of the TCJA.
Distributional Effects
Around the time of its enactment, distributional analyses of the TCJA showed that most of the benefits from the tax change would go to those at the top of the income distribution, largely because most of the tax cuts were for corporations and high-income individuals. However, proponents of the TCJA argued that, by decreasing tax rates, the law would also benefit workers by growing the economy and boosting wages. In 2017, the White House Council of Economic Advisors (CEA) estimated that a reduction in the corporate tax rate from 35 percent to 20 percent would increase wages for the average household between $2,700 and $5,900 by 2027, although high-income taxpayers were expected to garner more of the economic benefits. The American Enterprise Institute estimated that after-tax income for the top 10 percent would grow by about $2,230 in 2019 as a result of the TCJA’s corporate tax changes. Income growth for those lower in the income distribution was expected to be smaller: about $250 on average for the next 40 percent and $40 for the bottom 50 percent.
Understanding the actual distributional effects of the change in law is clouded by other policy changes and the COVID-19 pandemic, but according to a preliminary analysis from the Congressional Research Service, actual wage growth in the first year after enactment was lower than what would be expected to produce the kind of wage growth predicted by the CEA. More recent research finds that the benefits from the corporate income tax cuts in the TCJA went mostly to those in the top 10 percent of the income distribution, who collected 80 percent of the rate-cut benefits.
Adjusting the Corporate Tax Rate
As lawmakers and policy experts prepare for the expiration of individual income and other provisions of the TCJA in December 2025, some have pointed to the corporate tax rate as a component of the law to be revisited — despite the rate change to 21 percent being made permanent in 2017. Arguments for revisiting the corporate income tax rate vary, but if lawmakers want to further reduce the rate, it could significantly worsen the U.S. fiscal outlook.
Further, the international tax landscape has changed since the TCJA was enacted. Many arguments in favor of lowering the corporate tax rate in 2017 rested on making the United States more competitive. In 2017, only three countries had a corporate tax rate higher than the United States; by 2023, that number had risen to 71 countries and now includes China, Japan, the United Kingdom, and Italy. The international community has also made considerable progress on implementing a “global minimum tax” of 15 percent, which over 136 countries agreed to in 2021.
Changing the corporate income tax rate could have significant consequences for the U.S. economy and the federal budget, and calls to modify the rate are not new. Beginning with its first budget proposal for fiscal year 2022, the Biden Administration called for raising the corporate income tax rate to 28 percent; in its most recent proposal, it stated that raising the tax rate would be a simple way to raise revenues while making the tax code more progressive. The Department of the Treasury projected that the rate increase would raise revenues by $1.4 trillion over 10 years; the Tax Foundation estimated the revenue increase would be lower, at $1.0 trillion.
Others have called for a lower corporate tax rate. In his campaign, Donald Trump called for further lowering the corporate tax rate to 20 percent, or as low as 15 percent. Arguments for again lowering the corporate tax rate echo those from 2017, holding that a rate cut would boost American global competitiveness, increase economic growth, and raise wages. But another corporate tax cut would be costly for the federal government if not offset with other policies. Penn Wharton Budget Model projected that a corporate tax cut to 15 percent would reduce revenues by $596 billion over 10 years, while the Tax Foundation projected that such a reduction would lower revenues by $673 billion over that period.
Broadening the Corporate Income Tax Base
Although not a change to the corporate income tax rate itself, broadening the corporate tax base would increase revenues by expanding the scope of income subject to the tax. By eliminating exemptions, exclusions, deductions, and credits to broaden the corporate income tax base, the federal government could increase revenues without changing the corporate income tax rate — all while improving simplicity in the tax code.
Corporate tax expenditures are costly for the federal government in comparison to corporate income tax revenues. In 2024, corporate tax expenditures totaled $188 billion — equal to one third of corporate income tax revenues. The largest corporate tax expenditures were:
- the reduced rate on active income of controlled foreign corporations ($57 billion),
- accelerated depreciation of equipment ($37 billion),
- the credit for increasing research activities ($20 billion),
- the clean energy investment tax credit ($16 billion),
- the deduction for foreign-derived intangible income ($14 billion), and
- the credit for low-income housing ($13 billion).
Those six provisions account for about 80 percent of the total cost of corporate tax expenditures.
Conclusion
The reduction in the statutory corporate rate in the TCJA was the largest corporate tax cut in American history, but there is still uncertainty among economists about its effect on the economy and the extent to which it reduced federal revenues. As the expiration of other TCJA provisions approaches, there may be opportunities to re-examine corporate tax policies and explore reforms that promote economic growth while improving the nation’s fiscal outlook.
Image credit: Spencer Platt/Getty Images
Further Reading
Eight of the Largest Tax Breaks Explained
Tax breaks totaled over $1.9 trillion in 2024. That’s more than the government spends on Social Security, defense, or Medicare and Medicaid.
The U.S. Forgoes Hundreds of Billions of Dollars Each Year Due to Unpaid Taxes
Cracking down on the tax gap would not only introduce more fairness into the system, but it could be a big help for our nation’s fiscal imbalance.
How Much Would It Cost to Make the TCJA Permanent?
Most of the individual tax provisions and a handful of business provisions in the TCJA are scheduled to expire in the next few years.