President Biden has announced two ambitious, entwined economic policy agendas: raising the corporate tax rate and other taxes on large businesses to pay for a significant increase in spending on a broadly defined set of infrastructure objectives. While the case for at least some increase in infrastructure spending is sound, the case for unwinding the corporate tax reforms enacted in 2017 is not.
Raising the corporate tax rate to 28 percent, as the president has proposed, would virtually wipe out any competitive tax advantage gained by U.S. businesses since enactment of the Tax Cuts and Jobs Act. According to the Tax Foundation, a 28 percent corporate tax combined with the average state corporate tax rate would leave the United States with the highest combined statutory corporate tax rate among all Organisation for Economic Co-operation and Development nations. Moreover, these tax hikes will adversely affect workers’ wages. The Congressional Budget Office estimates that workers bear one-fourth of the corporate tax, while some academic research finds the impact on workers to be even larger.
A better means of offsetting the cost of additional infrastructure spending, and one consistent with the administration’s sensible goal of climate resiliency, is staring lawmakers in the face: a carbon tax.
According to a carbon tax calculator developed by Resources for the Future, a $15 per ton carbon tax, increasing at 6% annually, would raise a similar amount of revenue as President Biden’s corporate tax rate hike, and, instead of working against our economic prosperity, it can buttress it. A $35 per ton carbon tax would raise as much revenue as President Biden’s entire business tax agenda.
A carbon tax in lieu of corporate tax hikes will drive innovation across the energy and transportation sectors; spur new investment in wind, solar, natural gas, and other forms of cleaner energy; and drive down business and household demand for energy generally. And, as the cost of deploying these new technologies falls, global demand for these exports will rise and our economy will grow.
Moreover, a carbon tax will negate the need for many of the climate-related spending and regulatory policies that President Biden is also pursuing—policies that will hamper economic growth. If there is a silver lining here it is this: The Biden administration is signaling a willingness and openness to negotiate with lawmakers on the specifics of forthcoming tax agenda, and many in the business community have clearly shifted toward a supportive stance on carbon pricing. If the economic trade-off between a tax agenda that disadvantages U.S. businesses and one that advantages the climate is made more apparent, a carbon tax may have a chance.