Taxing Excessive Profits: Designing a Pro-Competition Corporate Tax System

Introduction

Political polarization defines much of how Americans see their government and their economy. Yet the American public shares a widespread concern—across political, generational, and class lines—over the outsized power of incumbent corporations and their failure to pay their fair share of taxes. About 7 in 10 Americans—both Republicans and Democrats—say large corporations have negative effects on the country (Pew Research Center 2024). Almost half of registered voters who support Trump say major corporations in the US make “too much profit,” and 65 percent of Trump supporters feel that corporations have “too much power” (Van Green 2024). Americans’ pervasive frustration with unchecked corporate influence over the economy extends to their views on how best to tax large businesses. About two-thirds of Americans polled contend that tax rates should be raised, with almost 40 percent arguing that corporate tax rates should be increased “a lot.” Again, this is not a partisan phenomenon: To be sure, 85 percent of Democrats support corporate tax increases, with almost 60 percent arguing to raise those rates “a lot.” But, in stark contrast to previous decades, 45 percent of Republicans now support corporate tax hikes. Even self-identified “conservative” Republicans are almost equally divided between wanting to raise, lower, or maintain corporate tax rates (Oliphant 2023).

This convergence of views about the excess power of large corporations over the economy—especially in light of how much else in US politics is polarized—may seem surprising on the surface. But these views are consistent with the lived realities of average Americans and find strong support in the data. Rising market concentration in the United States—fueled by both the creeping power of corporations and their ability to underpay taxes—has weakened the US economy, exacerbated economic inequality, and fueled a general feeling of disempowerment and economic backsliding. Incumbent firms’ growing ability to capture markets has been shown to change consumer decisions and distort incentives for innovation over time (Döpper et al. 2023). Recent research indicates that greater market power hampers wage growth (Azar, Marinescu, and Steinbaum 2019; Bivens, Mishel, and Schmitt 2018), increases inequality (Furman and Orszag 2018), and lowers investment (Eggertsson, Robbins, and Wold 2021; Farhi and Gourio 2019; Brun and González 2017; Gutiérrez and Philippon 2017), which in turn stunts productivity, market dynamism, and economic growth (Stiglitz 2012; Clausing 2024a). Market power is estimated to cost the typical American household $5,000 a year in higher prices, lower wages, and lost growth (Philippon 2019). Companies’ ability to control markets, while simultaneously paying low effective tax rates, directly facilitates the explosion of corporate profits and markups, especially in the pandemic and post-pandemic period (Konczal and Lusiani 2022; Davis 2024).

“Competition” has been the leitmotif leveraged by corporate tax cut proponents for decades, from the 1986 tax bill under Ronald Reagan through to the 2017 Tax Cuts and Jobs Act (TCJA) under Donald Trump. The idea was that lowering the tax dues of US corporations would strengthen their competitive advantages internationally. The less-discussed effect was that these reductions in the base and rate of the corporate income tax (CIT) disproportionately benefited large, multinational incumbent corporations, who were able to use these unearned tax advantages to extend their market dominance over smaller, domestic competitors—sometimes using their tax cuts functionally as cash reserves or “dry powder” to build market share by simply acquiring rivals. In this way, the tax cuts that proponents claimed would boost competitive advantages internationally instead reduced competition domestically, fueling the extensive and economically harmful corporate consolidation we see today (Brennan and Hudgins 2023).

This brief—originally presented as a discussion guide to the October 2024 convening “Promoting Equity and Efficiency: Rethinking Corporate Taxation to Address Market Power,” hosted by the Institute for Macroeconomic & Policy Analysis and the Roosevelt Institute—establishes a groundwork for developing a truly pro-competition corporate income tax system, focusing in particular on the economic case for taxing the excess profits of large US businesses.¹ Section I of this brief summarizes how the current corporate tax code exacerbates harmful market concentration and how effective taxation of excess corporate profits, or business rents, could yield positive economic effects. Section II reviews lessons from the historical and contemporary examples of excess profit taxation. Section III explores different design options and draws out careful considerations to guide the development of a corporate income tax system capable of raising revenue, reducing harmful market concentration, and boosting healthy economic competition.

Footnotes and Suggested Citation