Washington officials suggest that higher taxes can lead to economic prosperity, but history paints a different picture.
A report from the Congressional Research Service (CRS) released on April 21, titled “Corporate Taxation: The Revenue-Maximizing Tax Rate,” attempts to pinpoint a corporate tax rate that maximizes revenue. According to its basic assumptions, this peak rate might be around 70% or even higher. However, it’s essential to note that the study focuses solely on corporate tax revenue, neglecting overall federal revenue or broader economic implications.
This claim deserves a thorough rebuttal.
So, what did the CRS really do in this analysis? They revisited 2007 studies by Alex Brill and Kevin Hassett, the latter now serving as director of the National Economic Council, as well as Kimberly Clausing, who holds a position with the Biden Treasury. Both studies previously indicated that revenue-maximizing corporate tax rates likely fall in the mid-20s to low-30s percent range.
Ultimately, the CRS dismissed these earlier studies as “biased,” favoring a model that provides a different conclusion.
The Brill-Hassett study looked at OECD nations between 1980 and 2005, revealing strong statistical evidence for a corporate tax Laffer curve, where the revenue-maximizing rate has decreased over time to about 26%. This reflects a genuine economic trend: capital is mobile and shifts towards better opportunities.
In our global economy, the average corporate tax rate among OECD countries has declined from 47% in 1980 to 23% today, primarily because investors favor regions that treat capital favorably. This competitive landscape led to a global minimum tax agreement involving 137 countries—a clear sign that capital tends to move where it’s welcomed.
What followed the U.S. corporate tax rate reduction from 35% to 21% during the Tax Cuts and Jobs Act of 2017? The CRS suggests it was merely a handout without any growth benefits, but evidence points in the opposite direction.
A Tax Foundation study concluded that the TCJA increased the domestic private capital stock by 6.4% by 2025, raised wages by 1.7%, and boosted long-run GDP by 3%. Additionally, a peer-reviewed analysis comparing U.S. firms to Canadian ones found a significant uptick in American investment after the rate cut, especially in industries that tend to generate more jobs.
Before the TCJA, many U.S. companies had focused on restructuring overseas to escape one of the highest corporate tax rates globally. After the tax reduction, the Federal Reserve revealed that U.S. companies repatriated $777 billion in offshore earnings in 2018 alone, capturing roughly 78% of the estimated offshore cash holdings.
The trend of corporate inversions also came to a halt. As noted by the American Action Forum, “this phenomenon largely ceased following the enactment of the Tax Cuts and Jobs Act in 2017; since then, not a single major inversion has been reported.”
The main error of the CRS report is significant: maximizing revenue and achieving economic efficiency are not synonymous.
Economists consistently recognize that the revenue-maximizing point on a Laffer curve is usually much higher than the rate that optimizes growth. A tax can generate revenue even when it begins to discourage investment and wage growth.
Chasing maximum revenue from a dwindling economy isn’t a sound tax strategy; it’s a strategy for liquidation.
A landmark OECD analysis from 2008 found that corporate taxes pose the most substantial threat to long-term economic growth. A government fixated on extracting maximum revenue through such harmful taxes is fundamentally misaligned in its priorities.
The CRS report relies heavily on static revenue estimates while neglecting dynamic effects. It suggests raising the corporate tax rate from 21% to 28% would yield a static revenue increase of 33%, arguing the behavioral responses to such changes are minimal. However, those behavioral responses are critical, and static assessments overlook this crucial aspect.
As former National Economic Council Director Larry Kudlow asserts, tax policy should not be evaluated based on static figures but rather on its growth impact.
Policymakers should focus on how tax structures influence decisions to build, invest, hire, and expand in the future. Capital formation drives productivity, wages, and innovation over time. A government that prioritizes short-term revenue at the cost of long-term growth is mismanaging its economy—essentially squandering its future potential.
Those pushing for markedly higher corporate tax rates may use the CRS report to justify their stance, but we shouldn’t let complex econometric analyses cloud a straightforward truth: taxing success leads to less of it. When capital is treated as an asset to be extracted without regard for consequences, it tends to leave.
America’s challenge isn’t about collecting more revenue; it’s about fostering growth. History has shown that no government has ever tax its way to prosperity.
