Biden’s corporate tax hike is bad for growth — try a carbon tax instead

President Biden’s tax-and-spend infrastructure plan will reduce the competitiveness of U.S. corporations, burden working-class Americans, and discourage the type of private investment in America that fuels economic growth.

Under Biden’s proposal, the corporate tax rate would rise to 28 percent, ending the competitive advantage that U.S. businesses gained as a result of Republicans’ 2017 Tax Cuts and Jobs Act (TCJA). The TCJA brought the U.S. corporate rate below the average rate among Organization for Economic Co-operation and Development (OECD) countries. Biden’s plan would put the U.S. back to the highest combined (state and federal) statutory corporate tax rate among all OECD nations. Even compromises to hike the U.S. corporate rate to “just” 25 percent would raise the cost of capital and increase economic distortions.

In addition to putting us at an international disadvantage, this proposal will hurt working Americans. Economists have estimated that workers bear a significant share of the incidence of the corporate tax, 50 to 70 percent in some research. In other words, higher corporate tax rates will, on average, reduce incomes for workers, not just shareholders. 

The economic benefits of lower corporate taxes are straightforward. With lower taxes, corporations can attract and retain additional funds, which allows them to invest in new plants, equipment and processes that increase worker productivity and enable workers to negotiate higher wages. Biden’s proposed plan would reduce the amount of capital available for domestic workers, lowering productivity and ultimately resulting in lower wages.

One alternative for offsetting infrastructure spending — and one that the Biden administration and Congress should support — is a carbon tax. In contrast to a corporate tax hike, a carbon tax would drive advancements in the energy and transportation sectors, encourage fresh investment in alternative energy sources, and grow our economy and job market as global demand for these innovative technologies increases. On top of this, a carbon tax would achieve a critical climate-related goal: reducing carbon emissions.

One option is the MARKET CHOICE Act, originally proposed by former Rep. Carlos Curbelo (R-Fla.) and recently reintroduced by Reps. Brian Fitzpatrick (R-Pa.) and Salud Carbajal (D-Calif.). This legislation would eliminate the gas tax and impose an economy-wide $35-per-ton carbon tax. The tax would be imposed on the carbon content of imports, but a credit would be offered for exports — an arrangement known as a border tax adjustment. The revenues raised from the carbon tax would fund the Highway Trust Fund, block grants to states for low-income households, and a host of other related activities such as research and development and climate change-adaptation projects.

Even a more modest carbon tax could finance an increase in infrastructure investment. For example, a $15-per-ton carbon tax, increasing at 6 percent per year, would raise about as much revenue as Biden’s 28 percent hike on corporate taxes. (A $35-per-ton carbon tax would raise as much revenue as the entirety of his tax agenda.) Furthermore, a carbon tax would make obsolete many of Biden’s forthcoming “whole-of-government” climate regulations, standards, incentives and programs. 

While no revenue source is without controversy, a carbon tax is certainly superior economic policy to the president’s corporate tax agenda and a better way to finance needed infrastructure spending. The Biden administration understands the need to negotiate with Republican lawmakers on the specifics of a tax agenda, and many corporations and business trade groups openly support carbon pricing. As Washington struggles to make progress toward a fiscally responsible, bipartisan deal to address infrastructure needs, a carbon tax should be front and center.

Alex Brill is a resident fellow at the American Enterprise Institute and former chief economist and policy director to the House Committee on Ways and Means.

Alex Flint is the executive director of the Alliance for Market Solutions and former staff director of the Senate Committee on Energy and Natural Resources.