crs_reports: R48913

Congressional Research Service reports with summaries, authors, and topic classifications.

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R48913 Corporate Taxation: The Revenue-Maximizing Tax Rate 2026-04-21T04:00:00Z 2026-04-23T15:23:00Z Active Reports Jane G. Gravelle   Economists have long recognized that there are behavioral responses to the corporate tax, and that these responses have implications for the efficiency of the economy and the burden of the tax, as well as how much revenue a tax increase might raise. This report examines the research surrounding the revenue-maximizing corporate tax rate and explores implications for federal tax policy. The notion that a corporate tax cut could raise revenues (and thus “pay for itself”) was part of the debate in 2017, when the corporate tax rate was subsequently cut from 35% to 21%. A decade earlier, this issue played a much more prominent role during the corporate tax debate in 2007. Several studies appeared in 2006 and 2007 that estimated a revenue-maximizing corporate tax rate of around 30%, although one study estimated a higher rate of 56% for a large, less-open economy such as the United States. These studies used a panel of countries to determine corporate revenues as a percentage of GDP as a function of the statutory tax rate. This report examines two issues with these studies. The first is the incompatibility of the studies’ results with theoretical constraints on how low the revenue-maximizing tax rate can be. Because the pretax rate of return falls when the capital stock increases, the corporate tax base is relatively insensitive to tax reductions that increase investment. Under the most generous assumptions, theory suggests the revenue-maximizing tax rate is probably no less than 70%. Effects arising from avoidance and evasion of taxes by corporations are too small to account for a revenue-maximizing rate below the tax rates in effect before the 2017 corporate rate cut (from 35% to 21%). The second issue is an econometric one. For panel studies comparing trends, including fixed country and time effects is necessary to produce unbiased estimates. When CRS reestimated two of the most prominent studies with these fixed effects included, the results were generally statistically insignificant effects. In cases where estimates were marginally significant, the coefficients indicated no revenue-maximizing tax rate. A subsequent study addressed another issue with the econometric studies from 2006 and 2007: that the base may be changing at the same time as the tax rate. When controlling for the direction (although not the size), that study found a revenue-maximizing tax rate of 61% in general and a rate around 100% for a large, less-open country. A related set of literature estimated the elasticity of the corporate tax base with respect to the net-of-tax rate (1-t) (where t is the tax rate). This estimate can be used to calculate the implied revenue-maximizing tax rate. These studies used two different methods. The first approach also used a panel. The second examined the degree of clumping of observations below the kinks in the rate structure (where the statutory tax rate increased). The results of these studies largely indicated relatively high revenue-maximizing tax rates. The implications of theory, of correcting the earlier studies for lack of fixed effects, of accounting for simultaneous base changes, and of the literature on the tax base elasticity are that the revenue-maximizing corporate tax rate is high, and that increases in the corporate tax rate would likely raise close to the static revenue estimate. https://www.congress.gov/crs_external_products/R/PDF/R48913/R48913.5.pdf https://www.congress.gov/crs_external_products/R/HTML/R48913.html

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