Reduce Business Income Taxes

Author: Preston Brashers, Research Fellow

Affordability 101 · Chapter 6: Tax Reform

Plymouth Institute for Free Enterprise

Topline

The federal corporate income tax rate should be reduced from 21% to 17%, along with other reforms to federal and state business taxes.

Background

The U.S. currently has a 21% federal corporate income tax rate. The weighted average of states’ corporate tax rates adds an additional 4.53%, putting the combined U.S. corporate tax rate at about 25.53% as of 2025. Based on recent rankings, that is the 14th highest average corporate income tax rate out of 38 OECD countries. Reducing the federal corporate tax rate from 21% to 17% would put America near the 10 lowest corporate tax rates in the OECD, making America a far more attractive place for businesses to be located.

After corporate income is taxed at the business-entity level, profits that are distributed to shareholders are usually taxed a second time as dividends or capital gains. Most long-term capital gains are taxed at a rate of between 15% and 23.8%. Short-term capital gains face higher ordinary income tax rates.

Businesses that are organized as pass-through entities are taxed only under the individual income tax (no corporate income tax). The top individual income tax rate is 37%, but most pass-through income qualifies for a 20% deduction that effectively reduces the top marginal tax rate to 29.6%.

Action Items (Congress and States)

• Reduce the federal corporate income tax rate to 17%.
• Reduce state corporate income tax rates.
• Allow pass-through businesses to permanently elect to have a single flat 29% federal tax rate paid at the business level (not upon distribution), as a replacement for the complicated 20% pass-through deduction.
• Repeal the corporate alternative minimum tax.
• Offset any lost revenue with reduced government spending.

How It Would Make Life More Affordable

• Lower business taxes would lead to more business creation, more investment, more competition and innovation, higher productivity, and better-paying jobs.
• Lower business taxes would boost the stock market and retirement wealth.

Related Legislation: Book Minimum Tax Repeal (S. 796); amendment to reduce corporate tax rate (S. Amdt. 2366 to the One Big Beautiful Bill, failed).

Bottomline

Businesses are the economic engines that drive growth, create jobs, and produce the abundant goods and services that keep prices down. Steep business taxes stifle the nation’s economic engines.

This memo is part of Affordability 101, Advancing American Freedom’s playbook of 101 policy solutions to make life more affordable.

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