Falling Global Tax Rates Make U.S. Less Competitive

A lower U.S. tax rate plus simplification of the tax system would stimulate corporate expansion and spark economic growth, consultant says.
Jason GerlisJuly 18, 2017

A country’s corporate tax rate is one of the largest factors that dictate where and how much companies invest their money. Presently, the United States is one of the highest-tax locations in the world, with a federal rate of 35% for corporations plus an extra layer of state taxes. Over the past 10 years, the average worldwide tax rate has been declining, leaving the U.S. in a position of competitive disadvantage.

Jason Gerlis

Jason Gerlis

It’s important to note that the effective tax rate is actually lower due to a complex system of deductions and credits, although the time and effort businesses put into applying for them is itself a large burden.

Lowering the U.S. corporate tax rate to 20% to 25% while simplifying the tax system would stimulate corporate expansion and spark overall domestic economic growth. In the immediate term, a reduction of that magnitude could result in a decrease in tax proceeds, meaning less money for the government to spend. However, it would also provide companies with more money to reinvest over time, leading to tax revenue growth in the long run.

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Aside from the broad increase in U.S. economic output, lowering the corporate tax rate to 20% to 25% and reducing the complexity of the existing tax code would also lead to:

  • A step toward closing the skills gap: Better benefits packages and pay raises for employees as well as education courses to allow the American workforce to adapt to today’s ever-changing labor needs.
  • A boost in R&D spending: Additional revenue to be reinvested in growing areas of corporate interest (e.g., 3D printing, artificial intelligence). Manufacturing and fintech are poised to be among the sectors that will benefit the most from access to additional R&D revenue.
  • Influx of incoming investments: In addition to a lower corporate tax rate, a suggested tax holiday on profits parked offshore could be a clear incentive for corporations to bring money home, potentially boosting capital markets and economic activity.

In the current environment, the challenge for the United States is not to compete with tax havens but to offer a better value proposition. Simplifying the tax code and reducing tax rates would be good for the business climate and the overall economy, and especially for small businesses, which are not always able to take advantage of the tax-efficiency strategies employed by larger companies.

So where do we go from here? With budget season looming and tax-reform plans expected to take shape in the new few months, CFOs should gear up for scenario testing. Engaging with local experts and tax planners will ensure they have the proper advisors in place to help adapt to any restructuring that might come from changes in their tax exposure.

Looking at ways CFOs can untangle themselves from the various corporate structures established under the current tax code could be a good first step to take, as a simplification of the corporate tax structure will surely encourage leaner organizational structures. With potentially more money in the coffers, CFOs could also start planning ahead for more investments.

In the end, corporate taxes have two main purposes: propelling domestic investment and providing fuel for public spending. Lowering the U.S. federal corporate tax rate to 20% to 25% would allow U.S. businesses to be competitive in the global marketplace and repatriate their operations stateside, thus fueling U.S. economic growth for decades to come.

Jason Gerlis is regional director North America at TMF Group, which helps companies expand and invest across international borders.