By Mark Penn

About the author: Mark Penn is chairman and CEO of Stagwell, a technology-based global marketing services firm.

The corporate tax is the most misunderstood tax in the U.S. Corporate tax cuts -- and other policies that lower the effective corporate tax rate, such as those in the tax bill currently under consideration in the Senate -- are usually seen as only benefiting the fat cats. But more often than not, money from tax breaks fuels investments benefiting Main Street more than Wall Street.

When President Donald Trump slashed corporate tax rates from 35% to 21% in 2017, he helped boost growth in investment, jobs, and long-term corporate profits. Trump's "Big Beautiful Bill" tax bill, recently passed by the House of Representatives, would extend that growth. While it doesn't change the 21% statutory corporate tax rate, the bill proposes three key provisions that would lower the effective corporate tax rate -- how much U.S. companies actually end up paying.

That has reignited fears that the rich will only get richer, and corporations will pocket all of the money from tax breaks while the economy tanks further into debt. But that is just not how corporate taxes work -- and certainly not what goes on inside of a standard business.

Here is what actually happens, from my vantage point as an executive, previously at Microsoft for over a decade and now at Stagwell.

Flush with extra cash, companies pay off their loans. Then they pay their taxes and dividends. The rest of the money is invested in infrastructure and new jobs -- investments that help the company grow. And, of course, growing business grows the economy, too.

In my experience running a public company, the primary objective of many firms is to grow and scale rather than line shareholders' pockets. That is why tax cuts spur investment and job growth -- despite skeptics' concerns. The investor community has done a poor job of explaining this to the general public.

You could argue that corporate tax breaks aren't the most effective way to influence the behavior of very large companies that already have huge sums of money to grease their growth. But the preponderance of companies -- especially small and medium-size businesses -- are much more likely to invest the extra money into growth. Corporate tax breaks are particularly beneficial to smaller, growth-oriented companies. One study found that, after tax cuts, the percent change in small firms' investments is nearly double that of larger businesses.

The other part of corporate taxes that few understand is how dividends work and which entities the corporate tax rate applies to. The biggest payers of distributions to shareholders are organized as pass-through entities, or S-corporations, which don't benefit from corporate tax cuts, as they don't pay federal taxes directly. C-corporations, on the other hand, pay corporate taxes and are double-taxed on dividends. The majority of C-corps, including start-ups and tech companies eager to invest and grow, are therefore less interested in paying dividends.

Sure, some C-corps put the money toward stock buybacks. But that is just another way to invest in growth. (Buybacks encourage foreign investment, since foreign investors get taxed on dividends but not on buybacks.) As for dividends, even if some money does go to shareholders, in my experience, the share of earnings allocated to payouts is unlikely to change as a result of the corporate tax and is small compared with the amount of money that is reinvested.

After the passage of the 2017 Tax Cuts and Jobs Act, domestic investment increased 20% among firms who saw their taxes decrease, and tangible capital investment in infrastructure and equipment increased 11% at the firm-level. In 2018, Verizon invested nearly $17 billion in infrastructure and expanding wireless networks and high-speed fiber -- 70% more than its dividend payout. It invested even more the following two years. And Google, which at the time didn't pay regular cash dividends, nearly doubled its capital expenditures, investing tens of billions of dollars annually in data centers and IT infrastructure, including servers and network equipment.

Investment is directly tied to jobs and wage growth. When corporations need more workers, the price of labor goes up. Indeed, the 2017 corporate tax cut increased annual wages by an average of $750. And from January 2018 to April 2025, the number of nonfarm jobs grew by nearly 12 million, and the number of private jobs increased by more than 10 million. Greater foreign investment, motivated by a lower corporate tax rate and stock buybacks, also creates jobs because businesses are less incentivized to move operations overseas.

In the first year after the passage of the TCJA, the federal government's corporate tax revenue dove 40%. Experts estimated the cut would shrink federal corporate tax revenue by $100-150 billion a year for the next 10 years.

That didn't happen. It took a bit of time for investments to show up in the numbers, but since 2020, the government's revenue from corporate taxes has climbed as businesses' profits rose. Posttax corporate profits increased from 7.8% of gross domestic product in 2020 to 9.3% in 2021 -- the seventh largest year-over-year increase in half a century and the highest share of GDP since the government began economic record-keeping in 1929.

Now turning to the future. The "Big Beautiful Bill" proposes a 100% bonus depreciation, a five-year suspension of research and development amortization, and the expansion of interest expense deduction limits to adjusted earnings before interest, taxes, depreciation, and amortization, or Ebitda. Bonus depreciation allows companies to subtract the totality of equipment costs in the first year from their taxable income (typically, companies have to spread out the deduction across a few years). The same goes for R&D expensing: Companies can fully deduct research costs, including software development, in the year that they happen. That eases financial strain on firms with high innovation costs. And loosening interest expense deduction limits from Ebit to Ebitda means smaller, high-growth companies with a lot of capital costs, such as machinery or buildings, and innovation costs, such as patents and trademarks, can deduct more of their loan interest. This frees up cash flows for new investment in jobs and growth.

All three of these provisions lower taxable income for corporations, reducing the effective corporate tax rate. They would encourage businesses to invest today and take advantage of the five-year expiration date. And they would put U.S. companies on a level playing field with other countries in terms of innovation, competitiveness, and long-term growth -- no other OECD country uses an Ebit-based interest limitation. Indeed, the Penn Wharton Budget Model estimates the bill will increase GDP by 0.5% percent in 10 years and nearly 2% by 2054.

The effects of this bill will be smaller than the TCJA, but a return to the pre-2017 tax rate would be a drag on the economy. Corporate breaks, like them or hate them, are the best way to create more jobs and grow the economy.

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June 02, 2025 11:38 ET (15:38 GMT)

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