Corporate tax revenue has plummeted under President Donald Trump, even as corporate profits have reached record levels. The decline began after Republicans approved tax benefits that allow companies to more quickly deduct the cost of their investments.
Tax collections on profits from the largest companies in the United States fell about 15%, to $381 billion, in the fiscal year ended October 1, according to data released on Friday (16) by the Treasury Department. The drop, of approximately US$70 billion, came after a similar decline in the previous year. Compared to 2024, the last full fiscal year of the Biden administration, revenue decreased by more than 25%.
Behind the reduction are tax cuts approved by Republicans and signed into law by Trump last year. The law allows companies to deduct a larger portion of investments in the year they are made. The change came into effect as some of the country's largest technology companies began committing hundreds of billions of dollars to artificial intelligence projects, including data centers.
The cuts reduced revenue more sharply than analysts predicted. Executives involved in a race to develop more powerful AI models say they intend to continue expanding investments, which could put pressure on tax revenue in the coming years. New contributions can also boost company profits, widening the gap between earnings and taxes collected on them.
"It's very unusual to see a divergence of this magnitude, but it's not surprising because we know what's causing it," said Peter Berezin, chief economist at BCA Research, an investment analysis firm. "AI spending is expected to rise in the coming years, so these companies will be able to deduct an even larger portion of their expenses. If they didn't make huge profits, that would be one thing. But they do."
The drop in corporate revenue is just part of the deterioration in American public accounts. The gap between government spending and revenues approached $2 trillion in the last fiscal year as military spending and interest on federal debt rose. The debt held by the public, in excess of US$32 trillion, now equals almost the entire annual output of the economy, a proportion that has not been recorded since the years after World War II.
The deficit grows even though the economy remains relatively strong and unemployment is low. Corporate profits have increased in recent years, taking stock indices to record levels — a movement that, in theory, should boost corporate revenue. Revenue from personal income tax grew in the last fiscal year.
In the tax cut package, however, Republicans made a series of changes that allow companies to reduce the amount of income subject to taxation. The changes modified the deadlines for deducting the costs of new investments and research and development expenses. Instead of deducting the cost of computer equipment over several years, for example, companies can now deduct it in full at once.
Companies intensely pressured Congress for the change, which, although it may seem like a small accounting change, improves the economic viability of investments. Academic research found that the tax benefit, when it was previously in force, actually contributed to increasing investments, which could boost the economy as a whole.
That was before the scramble for artificial intelligence dominance triggered hundreds of billions of dollars in spending on chips, data centers and the electrical systems to power them. Large companies like Microsoft, Google and Meta seem so committed to expanding their investments that the tax incentive may have little influence on their plans.
“The managers of these companies are not exactly acting as if they feel constrained in their investment decisions right now,” said Matt Gardner, senior fellow at the Institute on Taxation and Economic Policy, a liberal-leaning think tank. "It seems uncontroversial to say we're rewarding these companies for something they would have done anyway."
The tax benefit covers business investments in general, not just data centers and other AI-related expenses. Although the tax change may stimulate new investments in other sectors, the race for artificial intelligence is so intense that it may be displacing investments in other areas. Financing the expansion of AI infrastructure contributed to rising interest rates, making loans for new projects more expensive across the economy. Prices of other business inputs also rose.
“We seem to have reached a point where the macroeconomy already has practically all the investment it can handle,” said Gabriel Chodorow-Reich, an economics professor at Harvard and co-author of a study that concluded that the tax benefit helped increase investment. "In these circumstances, increasing the marginal incentive to invest may ultimately raise the price of investment rather than generating more total investment."
The drop in corporate revenue is an early sign of how AI can transform the tax system. As companies and investors profit from AI, these incomes, under current legislation, are subject to lower rates than the salaries paid to workers, which can also be replaced by technology. In the long term, this could limit tax revenue as a whole.
On Wall Street, enthusiasm for artificial intelligence coexists with concerns about the public deficit. In addition to the tax cuts approved by Congress, the Trump administration has adopted regulatory measures that could reduce taxes paid by companies, including weakening a rule designed to limit corporate tax avoidance.
David Kelly, chief global strategist at JP Morgan Asset Management, said the American economy did not need the corporate tax breaks approved by Republicans last year.
"If you just had five cups of coffee, a sixth isn't going to do you much good," he said. "You're stimulating something that doesn't need stimulation."
