President Trump, as part of his “America First” program, has proposed lowering the US corporate tax rate to 15 percent and to close a myriad of loopholes in an effort to simplify the tax code, and to also encourage the nation’s largest businesses to bring production back home.
The proposal represents a tangible shift in the relationship between Washington and big business. In 2014, President Obama’s Treasury Department introduced new measures to crack down on corporate tax inversions, a strategy companies utilized to exploit gaping tax differentials between the United States and other countries. Burger King’s acquisition of Canada’s Tim Hortons, a coffee and doughnut chain, for example, was motivated in large part by Canada’s more hospitable tax environment.
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Back in 2000, America’s 40 percent corporate tax rate, including state and local taxes, was competitive with those of its trading partners. Now it’s not. While the US tax rate remains unchanged, Germany, Japan and the U.K. have all reduced their rates; in some cases, substantially. Germany took there’s down to 30 percent from 40 percent, the United Kingdom knocked theirs down to 20 percent from 30 percent and Japan slashed their corporate tax rate which was pegged at 40 percent to 23.9 percent.
Reducing the US corporate tax rate and flattening the tax code would go a long way to boost corporate investment in the US History has shown that companies want to do business in countries with hospitable tax rates. Of the five countries enjoying the highest foreign direct investment as a share of their economies, Ireland, Hong Kong and Singapore all sport corporate tax rates that are below 20 percent. Among the five countries with the worst foreign direct investment, only one, Russia, has a corporate tax rate below 30 percent.
Tilting the tax tables in America’s direction would undoubtedly boost business spending and investment here at home. American companies are holding $2.5 trillion abroad, an increase of nearly 20 percent over the past two years, according to the latest calculations from forecaster Capital Economics. The total is equivalent to nearly 14 percent of total US gross domestic product. This money is not lying idle but has been lent by the banking system outside the US to corporates and governments outside the US.
This tax cut, if it were to be implemented, could lead to capital flow back from rest of the world (periphery) to US (core) leading to a spike in the US dollar and sharply higher US equities.
By Ritesh Jain