Half a dozen years after Congress passed the first comprehensive rewrite of federal tax law in three decades, a proposal is pending that would return the United States to having one of the highest corporate tax rates in the industrialized world. Rates would rise by one-third, and the increase would come as retail and other sectors of the economy are still working to recover from the impact of the COVID-19 pandemic.
Raising the corporate tax rate would be harmful to economic growth, resulting in higher prices, lower wages and fewer jobs.
Under the Biden administration proposal, the federal corporate tax rate would increase to 28% from its current 21% and the combined federal-state rate would go from 25.8% – already the 13th highest among the 38 nations in the Organization for Economic Cooperation and Development – to 32.8%. That would be the highest rate of any OECD country except Colombia, according to a recent Manhattan Institute study on “The Limits of Taxing the Rich.” By comparison, all but two OECD nations have reduced corporate rates since 2000 amid “intense global competition for investment, markets, consumers and workers.”
NRF helps run the Rate Coalition, which says with inflation still high and a recession not yet ruled out, “now is not the time to raise taxes.” According to the coalition, raising the corporate tax rate would be harmful to economic growth, resulting in higher prices, lower wages and fewer jobs.
Retailers benefit from few of the tax incentives, deductions and credits that reduce taxes for other businesses, and consequently pay one of the highest effective tax rates of any industry – at or close to the full statutory corporate income tax rate. That is why NRF strongly supported the Tax Cuts and Jobs Act of 2017, which eliminated a wide range of corporate tax breaks and used the money saved to lower rates for all businesses, large and small alike. With the tax rate lowered to 21% from the previous 35%, the savings for retailers was estimated at $171.4 billion over 10 years.
Retailers have invested the savings in their businesses and employees, both creating jobs and increasing wages and benefits. Improved wages and benefits cannot be rescinded if Congress takes back the tax cut, and the competitiveness of the retail industry makes it difficult to pass along higher taxes in consumer prices, particularly in the current economy. Instead, the tax increase could force retailers to eliminate jobs, close their least-profitable stores and cut back on investments in ecommerce capability needed to meet the shift to online shopping brought by the pandemic.
NRF was a leading supporter of the Tax Cuts and Jobs Act and is fighting equally hard to preserve its benefits. NRF commissioned a study by Ernst & Young as a key part of its efforts to show lawmakers the impact of the proposed tax increase. The study found raising the corporate tax rate to 28% would cause net declines in consumption of 0.2%, GDP of 0.3%, wages of 0.5% and investment of 0.8% – billions of dollars in impact even after allowing for any increase in economic activity created by infrastructure spending. An estimated 730,000 jobs would be lost.
The combined 32.8% federal-state rate compares with as little as 10% in China, the United States’ biggest economic competitor. NRF member retailers already pay a total effective tax rate between 22.5% and 29.9% when state and local incomes taxes are included, according to an NRF survey.
Despite claims that the tax increase would not affect families with annual income below $400,000, the study found about a third of the burden of the economic impact would fall on workers through job losses and lower wages.