The writer is the Eric M Zolt professor of tax law and policy at the UCLA School of Law and served in 2021-2022 as the deputy assistant secretary for tax analysis at the US Treasury
Advocates for taxing the rich often have novel ideas about how to do so. Voters in California will soon cast ballots on a billionaires’ wealth tax, a one-time levy of 5 per cent on residents with more than $1bn in assets. Some Democrats in the US Senate champion “billionaires’ income taxes” that would tax unrealised capital gains. While these proposals have laudable aims, the former risks harming a mobile tax base and the latter poses serious constitutional challenges.
There is a better approach to consider: raising a tax that is already in place — the federal corporate income tax, now levied at a statutory rate of 21 per cent, though effective rates are far lower. Increasing the corporate tax rate by 6 to 9 percentage points for fewer than 2 per cent of corporate taxpayers would reach more than 95 per cent of corporate taxable income. Alongside base-broadening reforms, a corporate tax increase could raise about $4tn over a decade — about 0.9 per cent of GDP, according to the Penn Wharton Budget Model.
The case for a corporate tax increase is strong. It would achieve many of the goals sought by supporters of a billionaires’ tax. It could also address both the populist impulses that brought Donald Trump to power and the increasingly fragile US fiscal situation — all without the underlying flaws of other proposals. Supporters of the Californian proposal stress that it is a one-time wealth tax which would avoid the risk of billionaires curtailing their residence or activities in California. However, many of those billionaires fear it will be levied again in the future.
This dynamic illustrates a broader problem with tax competition. When taxpayers can move to a place with different rules, their income is harder to tax.
A nationwide, federal approach relying on the corporate tax has more promise. Although corporate interests would oppose it, large majorities of voters are in favour of higher corporate taxes. And implementing “billionaires’ income taxes” across America would also face obstacles. Aside from winning the requisite votes in Congress, which would be a tall order, such taxes would encounter constitutional hurdles. The current US Supreme Court is sceptical of wealth taxes, and at least four (and possibly more) of the justices appear similarly sceptical of taxing unrealised capital gains.
In contrast, the increased corporate tax could meet many important aims of our tax system in a time-tested fashion. First, the corporate tax as levied is steeply progressive, as shown by all major tax estimators, raising revenue disproportionately from those at the very top of the distribution. It also captures US equity income that would otherwise go untaxed — including that held by foreign investors, tax-exempt institutions (such as university endowments) and tax-exempt retirement accounts or pensions.
The corporate tax has large potential. Despite having the world’s most successful public companies, the US raises much less from corporate tax (about 2 per cent of GDP less) than other rich countries. A modest increase on fewer than 2 per cent of US corporations can close nearly half the gap between what the US collects in corporate tax revenue and what peer nations manage.
Further, US adoption of international tax reforms to levy a higher minimum tax on the foreign income of US multinationals could counter offshoring incentives. This approach would better align US policy with international efforts to tackle tax competition. Such reforms provide a real response to offshoring, in contrast to Trump’s regressive and disruptive tariff regime.
By concentrating the increase on the largest firms, the corporate tax can act as a pro-competition policy lever. It is also a flexible response to the challenges posed by the AI revolution. There is no need to predetermine the economic success of AI, which firms are AI firms or how much AI adoption displaces labour. Instead, the corporate tax will tax excess profits wherever they arise, whether from AI deployment, the war in Iran, a profitable patent or other sources.
Finally, the corporate tax is not subject to the weaknesses of other taxes on capital. The federal corporate tax was ruled constitutional even before personal income tax was made constitutional (in 1913, by constitutional amendment).
All that remains is the will to tax the world’s most profitable companies, something the coming years may well provide. Fiscal pressures will mean more revenue is needed. By both populist and policy criteria, the corporate tax is worth a close look.