Washington’s tax bureaucrats want you to believe you can tax your way to prosperity. History says otherwise.
The Congressional Research Service’s April 21 report, Corporate Taxation: The Revenue-Maximizing Tax Rate, uses a model to estimate the corporate tax rate at which corporate tax revenue is maximized. Under its baseline assumptions, that peak occurs at roughly 70% or higher. The exercise is explicitly narrow, as it only examines corporate tax revenue in isolation, not total federal revenue or broader economic effects.
It warrants a serious rebuttal.
So what did the CRS actually do? It revisited the 2007 studies by Alex Brill and Kevin Hassett, now President Donald Trump’s National Economic Council director, and Kimberly Clausing, a Biden Treasury appointee — both of which find revenue-maximizing corporate tax rates in the mid-20s to low-30s range.
The CRS ultimately labeled those studies “biased,” after adopting a model that produces a different result.
The Brill-Hassett study examined OECD countries from 1980 to 2005 and found robust statistical evidence of a corporate tax Laffer curve, with the revenue-maximizing point declining over time toward approximately 26%. It reflects a real-world phenomenon that no amount of fixed-effects modeling can wish away: capital is mobile, and it moves toward opportunity.
In a globalized economy, the average OECD corporate tax rate has fallen from 47% in 1980 to 23% today because capital goes where it is treated well. That competitive pressure ultimately produced a global minimum tax agreement among 137 countries — a policy response that only makes sense if capital is mobile.
And what happened when the United States cut its corporate rate from 35% to 21% under the Tax Cuts and Jobs Act of 2017? The CRS would have you believe it was a giveaway with no growth dividend. The evidence says otherwise.
A Tax Foundation analysis concluded the TCJA grew the domestic private capital stock by 6.4% by 2025, boosted wages by 1.7% and raised long-run GDP by 3%. A peer-reviewed study comparing U.S. firms with Canadian counterparts found investment significantly increased for American firms following the rate cut, particularly in capital-intensive industries that create the most jobs.
Before the TCJA, American corporations spent years restructuring overseas to escape one of the highest corporate tax rates in the developed world. After the rate cut, the Federal Reserve confirmed that U.S. firms repatriated $777 billion in overseas earnings in 2018 alone, roughly 78% of the estimated stock of offshore cash holdings.
The corporate inversion epidemic stopped cold as well. As the American Action Forum noted, “this phenomenon largely ceased following the enactment of the Tax Cuts and Jobs Act in 2017; since the TCJA’s passage, not a single major inversion has been reported.”
The CRS report’s central mistake is simple and damning: revenue-maximizing and economically optimal are not the same thing.
Economists have long recognized that the revenue-maximizing point on a Laffer curve sits well above the growth-maximizing point. A rate can keep squeezing additional revenue past the point where it begins seriously discouraging investment, productivity, and wages.
Collecting the most possible revenue from a shrinking economy is not a tax policy. It is a liquidation strategy.
A landmark 2008 OECD study concluded that corporate taxes are the single most harmful form of taxation for long-run economic growth. A government chasing peak revenue extraction from the most growth-destructive tax in the modern economy is optimizing for the wrong variable.
The CRS report also leans heavily on static revenue estimates and gives little weight to dynamic effects. It says raising the corporate rate from 21% to 28% would produce a “static revenue increase” of 33%, then argues that behavioral responses are too small to matter. Yet the behavioral response is everything and static scoring misses that.
As former National Economic Council Director Larry Kudlow argues, tax policy should be judged not by static revenue projections but by its effects on growth.
What policymakers should care about is not how much revenue a tax collects next year, but how the tax structure shapes incentives to build, invest, hire and expand going forward. Capital formation drives productivity, wages, and innovation over time. A government that maximizes short-run revenue extraction at the expense of long-run capital formation is not governing wisely. Instead, it’s eating its seed corn.
Those who advocate dramatically higher corporate tax rates will cite the CRS report as intellectual cover for a policy that real-world evidence does not support. Don’t let econometric complexity obscure a simple truth: when governments tax success, they get less of it. And when they treat capital as a captive resource to be extracted at will, it exits.
America does not have a revenue problem. It has a growth problem. And no government in history has taxed its way into prosperity.
James Carter is Principal & Policy Director at Navigators Global and a former senior economic and policy official at the U.S. Department of the Treasury, the National Economic Council, and the U.S. Senate Budget Committee.
The views and opinions expressed in this commentary are those of the author and do not reflect the official position of the Daily Caller News Foundation.
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