Three Corporate Tax Hikes Could Undermine TCJA's Competitiveness Gains

By Marcus Bennett

Three Corporate Tax Hikes Could Undermine TCJA's Competitiveness Gains

The Tax Foundation has published a policy analysis titled "Three Corporate Tax Hikes That Would Undermine TCJA's Improvements to Competitiveness." The Washington-based think tank argues that the three proposed corporate tax increases identified in the report would unwind the competitiveness benefits delivered by the 2017 Tax Cuts and Jobs Act (TCJA).

The law cut the federal corporate rate from 35% to 21%.

What does the TCJA baseline represent?

The TCJA took effect on January 1, 2018. Its central change, a 14-percentage-point reduction in the federal corporate rate, brought the U.S. statutory rate below the Organisation for Economic Co-operation and Development (OECD) member-country average at the time of passage.

The Tax Foundation's competitiveness thesis, as reflected in the report's framing, rests on that gap: a lower headline rate, the group argues, supports capital formation (the pool of money businesses invest in productive assets) and shapes the effective tax burden on multinational income.

The new analysis contends that each of the three increases under examination would narrow or eliminate that rate advantage, depending on the structure of the proposal. The report's headline suggests a return toward pre-TCJA effective burdens, when the combined federal-state rate hovered in the 25% to 27% range.

What is the competitive frame?

Corporate tax competitiveness, in the foundation's usage, refers to the relative attractiveness of a jurisdiction's tax code to mobile capital. That covers the location decisions of multinational headquarters, factory siting, and profit-shifting structures (arrangements that move reported earnings to lower-tax affiliates). The Tax Foundation has published a body of work on this question; the new analysis sits within that research line.

For U.S.-headquartered multinationals, the implication is straightforward: a higher domestic rate reduces after-tax returns on capital deployed in the United States relative to peer jurisdictions, narrowing the advantage the TCJA was designed to create.

What should finance leaders watch?

Treasury and tax functions should track three signals:

• Federal statutory rate proposals. Any movement above 21% at the federal layer directly erodes the TCJA's central rate differential.
• State-level conformity. Most states tax corporate income using federal taxable income as the starting point, so a federal rate change flows through to state liability in many jurisdictions.
• International comparators. The OECD's global minimum tax framework, known as Pillar Two (a 15% floor on large multinationals' foreign income), already constrains the rate competition that the TCJA sought to exploit.

The interaction with Pillar Two deserves emphasis. The 15% floor neutralizes the rate-competition tool that lower-statute-rate jurisdictions once used to attract investment. For U.S. companies, a federal rate increase above 21% would now cost more in relative terms than it did in 2017, because the international floor compresses the range within which countries can differentiate.

The Tax Foundation's analysis lands as congressional budget debates focus on revenue offsets. Finance leaders planning 2025 and 2026 capital allocation should pressure-test their effective tax rate assumptions, the percentage of pre-tax profit consumed by taxes, against a return to the 25% to 27% combined federal-state range.

Treasury teams that have built capital plans around a stable 21% federal rate should specifically test how a 4- to 6-percentage-point ETR shift would alter the cross-border allocation of debt and equity. Corporate development groups should re-price any acquisition models built on post-2018 effective rates, and transfer pricing documentation, the required paper trail for how multinationals price intercompany transactions, should be reviewed given that a higher U.S. rate narrows the spreads on which many existing arrangements rest.

The full Tax Foundation analysis details the three specific measures and the modeling assumptions behind the competitiveness claims; the report is available through the foundation's website.