Potential prices of a US company tax hike to world competitiveness

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Potential costs of a US corporate tax hike to global competitiveness

At the heart of the $ 2 trillion infrastructure bill proposed by the Biden government is an increase in the highest corporate tax rate to help meet the cost of the massive spending plan. However, a finance professor Michael Faulkender At the University of Maryland’s Robert H. Smith School of Business, the effects of the tax hike will be felt in competing to attract businesses to locate and maintain operations in the United States.

The Trump administration’s Tax Cut and Employment Act (TCJA), passed in 2017, was intended to strengthen the country’s position in this area by limiting the ability of companies to keep money overseas, he says.

“Before TCJA, if you worked domestically, you would pay 35% federal corporate income tax. If you were able to structure your international operations in a certain way, you could be essentially paying zero at this point and that would be postponed until the money was returned to the US, “says Faulkender. “What happened as a result of TCJA is that if you operate here in the US, it’s 21%; If you work abroad, the tax rate is around 13%. So depending on where you work, there weren’t that big of a tax difference. “

Before the TCJA, the United States had the highest corporate tax rate of any country in the United States Organization for economic cooperation and development (OECD), a group of the most advanced economies in the world.

With the new tax law, which came into force in 2017, incentives for investments at the front end should be created, says Faulkender. It reduced corporate tax revenues to stimulate investment, and these funds were later caught up by increased economic activity. It was a strategy that was gradually catching on, says Faulkender, but then the COVID-19 pandemic drastically changed business operations around the world.

“It was assumed that the immediate expenses would cause corporate tax revenues to decline within the first year or two, but that corporate tax payments would pick up again,” says Faulkender. “We saw this pre-pandemic recovery with corporate tax revenues increasing by around 20% in the first four months of fiscal 2020.”

The TCJA also aimed to discourage U.S. companies from relocating or relocating their headquarters to countries with lower corporate tax rates, even if most of the operations take place domestically, by reducing the potential tax burden on these companies, Faulkender says.

“By increasing corporate tax rates, we risk reducing private sector activity in the years to come.”