A Corporate Tax for the Next One Hundred Years: A Proposal for a Dynamic, Self-adjusting Corporate Tax Rate

Rosenzweig, Adam H. | March 1, 2014

The United States has included some form of income tax on corporations at least since the enactment of the Sixteenth Amendment one hundred years ago. Notwithstanding this long lineage, however, surprisingly little is known about who ultimately ends up bearing the cost of the tax, or whether it even matters. Perhaps in simpler economic times such as 1913, or 1932, or even 1980, this might have been acceptable. But as the world confronts vastly different economic conditions than the ones faced in the past, finding new ways to understand and implement the corporate tax for the next one hundred years will become crucial to its survival. This Article will introduce one such way, by taking into account how macroeconomic conditions, such as high unemployment, impact who bears the cost of the corporate income tax. This insight can fundamentally alter the landscape of the existing corporate tax policy debate, from whether to use corporate taxes to increase the progressivity of the income tax, to lowering the corporate tax rate to stimulate the economy, to abolishing the corporate tax altogether. By explicitly incorporating both macro- and microeconomic considerations into fiscal policy, policymakers can transform the corporate income tax from a blunt and uncertain fiscal tool into a precise instrument robust enough to survive the next one hundred years.

This Article will consider one specific example—proposing a dynamic, self-adjusting corporate tax rate, or DST for short. The DST takes into account the fact that specific macroeconomic conditions, such as high unemployment, can create incentives for employers to shift the cost of the corporate tax onto labor through lower wages, increased layoffs, or otherwise. The DST offsets this by charging employers (through higher marginal tax rates) when they do shift the cost of the corporate tax onto labor while, at the same time, rewarding employers (through lower marginal tax rates) when they make instead new investments in labor. In this manner, the DST could help reduce existing tax-induced distortions to behavior and address high unemployment at the same time.