When policymakers who support progressive taxes someday control Congress and the White House, what tax reforms should they enact?
There are plenty of progressive tax proposals before Congress, including many that the Institute on Taxation and Economic Policy (ITEP) has been deeply involved in.
But it’s important to acknowledge that some may be more resilient than others, meaning some of these proposals are less likely to be sabotaged by a radical Supreme Court, a future president in the mold of Donald Trump, or even a future Congress bent on further clawing back our tax system in unprecedented ways.
The new report we released today explains why reforms to the federal corporate income tax might be more resilient than other ideas that are frequently discussed, like expanding the personal income tax to apply to unrealized capital gains or introducing a federal wealth tax.
All of these are important proposals, and lawmakers who support tax justice should pursue all of them. But corporate tax reforms should be the backbone of any progressive tax agenda and should be counted on to remain if other changes to our tax code are later thwarted by any of the three branches of government.
The good news is that there is a real debate over taxing the wealthiest Americans, which was not always the case. Since the public was repulsed by the first round of tax cuts enacted under Trump in 2017, tax experts who support robust and progressive taxes began to seriously debate how to get the wealthiest Americans to pay taxes commensurate to their ability to pay.
It was plain that the federal personal income tax, at least as it traditionally operates, fails at this. As a result, many of us have explored novel approaches.
One novel proposal would introduce a federal wealth tax, meaning a federal tax directly on the net worth of the wealthiest Americans.
Another idea would expand the personal income tax to apply to certain income of the wealthy that is currently ignored by the tax code, like unrealized capital gains. Unrealized capital gains are increases in value of assets that contribute to the rising net worth of their owners.
But times have changed, and proposals to tax wealth and unrealized gains are no longer enough. Tax law, like many types of law, is less stable today than it has been in the past. Any tax law enacted could be sabotaged in the future in different ways.
The Supreme Court is more right-wing than it has been in several generations and has signaled that it might strike down any federal law that taxes wealth or even appreciation of assets (unrealized capital gains).
Meanwhile, President Trump has set new precedents for an executive branch that operates outside the law, including in tax law, where his Treasury Department has unilaterally cut taxes in ways that may be difficult to challenge in court.
It is unclear whether federal courts would allow any party to sue to block tax-cutting regulations even if they clearly violate tax statutes enacted by Congress. Federal courts seem to believe that no one is sufficiently harmed to have standing to sue in this situation.
The legislative branch is equally volatile, as Trump’s supporters in Congress have demonstrated that they are willing to overturn major legislation like parts of the Affordable Care Act and the Inflation Reduction Act in ways that would have seemed far more controversial a generation ago.
The federal corporate income tax is the ideal tool to achieve the goals of progressive tax policymakers in this volatile environment for several reasons.
First, a reformed and expanded corporate income tax can ensure that the income flowing to the best-off Americans is taxed at its source, which is the businesses that are enriching them. Nearly all the income and wealth flowing to people like Jeff Bezos and Elon Musk are generated by businesses that they own or control.
These businesses are either “C corporations” under the tax code, meaning they are required to pay the federal corporate income tax, or they could be classified as such with legislative changes.
Second, corporate tax changes can be very resilient in the years following their enactment compared to other types of tax reforms.
Tax reforms are less likely to be blocked by the Supreme Court if they rely on the corporate income tax. Whether justified or not, the Supreme Court has at times sharply limited Congress’s power to tax individuals directly, which led to the 16th Amendment in 1913 empowering Congress to enact a personal income tax. Today some justices claim that other types of taxes like wealth taxes are not constitutional.
But the Supreme Court never limited Congress’s power to tax corporate income. Even before the 16th Amendment, courts justified a federal tax on corporate income as a federal excise tax on the privilege of operating through a corporation, which is clearly within Congress’ power under the Constitution.
Corporate tax reforms could be more resilient to sabotage by a future president. For example, Congress could provide some party (such as state governments or a specific group of individuals) with a benefit funded by corporate tax revenue, and which would be diminished any time the executive branch takes action that reduces corporate tax revenue. This could make federal courts more likely to allow a case to challenge the regulation.
Corporate tax reforms can also be more resilient to sabotage by a future Congress if the U.S. works to reinstate the global minimum tax agreement with governments around the world in its original, stronger form, without the special provisions that the Trump administration demanded to weaken it.
Under the global minimum tax as originally conceived, if the U.S. or any other government attempts to cut taxes of its corporations below a certain level, participating governments will step in and collect additional taxes on those corporations’ operations within their borders, likely neutralizing the tax cut the companies would have received from their own government.
For these reasons, our new report recommends three federal corporate income tax reforms to raise revenue and adequately tax income flowing to the wealthy at its source:
- Establish a strong global minimum tax: Implement a minimum tax on corporations that meets and exceeds the standards of the global minimum tax that other countries are implementing.
- Subject “pass-through” businesses to corporate tax: Expand the corporate income tax to apply to large businesses that are currently structured to avoid it.
- Raise the corporate tax rate: Raise the corporate income tax rate on the largest companies to fully capitalize on the first two changes, which will have closed off the most common ways businesses avoid corporate tax increases.
