The Global Trend: A Strategy of Tax Reduction

 

October 9, 2024

The global corporate tax race has shown that lowering taxes is an effective way to stimulate business activity, attract investment and promote economic growth.

The Trump administration’s Tax Cuts and Jobs Act was a major step forward, simplifying the tax code, lowering corporate taxes, and modernizing the system to be more competitive. However, more can still be done to position the US as a leader in attracting global business investment. Further reductions in the corporate tax rate, permanent investment incentives, and simplifying tax structures would help ensure that the US continues to be a beacon for innovation and economic growth.

The Biden-Harris Presidential Administration on March 11/24 sent Congress a fiscal year (FY) 2025 budget that proposes to increase taxes by nearly $5 trillion for corporations and individuals with incomes above $400,000.  Many of the Administration’s tax proposals -- including a proposal to increase the corporate tax rate to 28% and impose a 25% minimum tax on certain high-income individuals – were included in the Biden-Harris Administration's previous budgets.  New tax proposals in the FY 2025 budget include measures to increase the recently enacted corporate alternative minimum tax rate from 15% to 21% and to deny business deductions for employee compensation above $1 million.

The Biden-Harris Administration continues to propose one of the highest corporate tax rates in the world, while many countries have recognized the benefits of reducing taxes and have reaped the rewards. To remain competitive in an increasingly globalized world, the US must adopt a more proactive approach to corporate taxation, focusing on lowering rates, simplifying the tax code, and creating incentives for businesses to invest domestically. By doing so, the United States can once again become a magnet for investment, innovation, and growth.

The United States has been criticized for maintaining a higher corporate tax rate, which may discourage businesses from setting up there. Additionally, US Democratic Party politicians are seen as focusing more on penalizing large corporations, rather than fostering a pro-business environment. The following points summarize the global trend of corporate tax reduction:

1. Global Tax Reductions: 39 countries, including developing nations, socialist economies, and former communist states, have reduced their corporate tax rates significantly over the past few years.
2. Examples of Tax Cuts: Countries like Belarus (24% to 18%), Brazil (34% to 25%), Canada (several reductions in the last decade), and the UK (21% now) have made cuts to stimulate investment.
3. Corporate Tax as a Competitive Tool: Nations like Singapore, Estonia, and the Czech Republic have adopted tax structures that encourage business formation and investment, even going so far as to offer special tax benefits for small businesses or offshore entities.
4. US Strategy Critique: US policies are viewed as more focused on preventing tax avoidance through reforms and shutting down international tax shelters, rather than incentivizing investment through tax rate reductions.
5. Impact on Businesses: The high US corporate tax rate is seen as a deterrent to businesses that could otherwise boost economic activity and government revenue. Meanwhile, countries with more favourable tax environments are reaping the benefits of foreign direct investment (FDI).

The Global Corporate Tax Race and the United States: A Critical Examination

Over the past few years, a global shift has taken place in how nations approach corporate taxation. The prevailing trend is toward lowering corporate tax rates to attract foreign investment, stimulate local economies, and encourage the establishment of new businesses. Many countries, including some that one might not associate with capitalist policies, have recognized the potential economic benefits of this strategy. Meanwhile, the United States, despite its position as a global economic leader, continues to maintain a relatively high corporate tax rate. This has raised questions about whether the US is falling behind in the race to create a more attractive business environment.

The Global Trend: A Strategy of Tax Reduction

Countries around the world, including nations with vastly different political and economic systems, have been slashing their corporate tax rates. From former Soviet states like Belarus, which reduced its rate from 24% to 18%, to emerging market economies like Brazil, which cut its corporate tax rate from 34% to 25%, the goal is clear: attract investment by lowering the tax burden on businesses. Other examples include:

• Canada: Despite a slight increase this year, Canada has reduced its corporate tax rate five times in the last decade to make the country more business-friendly.
• United Kingdom: After five cuts in the past decade, the corporate tax rate now stands at a competitive 21%.
• Singapore: This financial hub has reduced its tax rate to 17%, with small businesses able to pay far less through exemptions.

Countries in Europe, Asia, Africa, and South America have all embraced this model of competitive tax reduction. Even nations with reputations for being socialist or politically unstable—such as Denmark, Sweden, and Yemen—have made significant cuts to corporate tax rates to attract investment. The common theme among these countries is the recognition that lower taxes can stimulate both domestic and foreign business activity, ultimately leading to greater economic growth.

The Impact on the US Economy

The high US corporate tax rate creates several challenges:

1. Capital Flight: Higher taxes incentivize companies to move operations abroad to jurisdictions with lower tax rates. Countries like Ireland, Singapore, and Switzerland have become popular destinations for US businesses seeking to reduce their tax liability.
2. Reduced Business Formation: The high cost of doing business in the United States discourages new businesses from setting up shop. Startups, in particular, may find it more attractive to establish themselves in countries with lower corporate tax rates.
3. Lost Investment Opportunities: As global investors look for the best return on investment, countries with lower corporate tax rates are more likely to attract FDI. This means that the US may miss out on billions of dollars in potential investment, which could stimulate economic growth and create jobs.
4. Public Perception: The political focus on vilifying large corporations has created a public discourse that frames “big business” as the enemy. This narrative distracts from the real issue: how to create a tax environment that promotes growth and innovation.

US Tax Reforms: A Step Forward Under the Trump Administration

In 2017, the Tax Cuts and Jobs Act (TCJA) under the Trump administration aimed to address some of the competitiveness concerns surrounding the US corporate tax environment. One of its major provisions was the reduction of the federal corporate tax rate from 35%—which had been among the highest in the world—to 21%. This change was a major shift toward aligning the US with global tax trends.

Key aspects of the TCJA included:

1. Corporate Tax Rate Cut: The drop from 35% to 21% put the US more in line with international competitors, encouraging businesses to invest more domestically.
2. Simplification of the Tax Code: The TCJA simplified parts of the US tax code, including reducing the number of tax brackets and eliminating certain loopholes. This made tax compliance easier for many corporations, particularly smaller businesses, and aimed to reduce tax avoidance strategies.
3. Territorial Tax System: The TCJA also introduced a form of territorial taxation, where US companies would only be taxed on profits earned within the US, rather than taxing global profits. This was a significant shift that reduced the disincentive for US companies to repatriate earnings from overseas.
4. Temporary Tax Incentives for Capital Investment: The Act included provisions for businesses to immediately deduct the cost of certain capital investments, which boosted corporate spending on infrastructure, equipment, and research.

The Need for Further Reforms

While the Tax Cuts and Jobs Act was a major step forward, challenges remain. Many businesses still face a higher overall tax burden due to state and local taxes, and certain complexities remain in the tax code. Additionally, although the TCJA offered short-term incentives for investment, the longer-term implications—particularly around temporary provisions—mean that further reforms may be necessary to maintain competitiveness.

Proposed Solutions

To remain competitive, the US should consider additional reforms that build on the foundation laid by the Tax Cuts and Jobs Act:

1. Further, Reduce the Corporate Tax Rate: Although the reduction to 21% brought the US in line with some competitors, further reductions to 15%-18% would help the US keep pace with countries aggressively lowering their rates to attract business.
2. Permanent Capital Investment Incentives: Making provisions for capital investment permanent would help businesses plan for long-term growth, instead of relying on temporary incentives.
3. Enhanced Simplification: While the TCJA simplified certain aspects of the tax code, further efforts to streamline corporate taxes and reduce compliance costs could boost economic growth, especially for small and medium-sized enterprises (SMEs).
4. Additional Regional Economic Incentives: The US could also explore regional economic zones with reduced taxes, modelled after successful special economic zones in countries like China and India. These zones would attract investment into underdeveloped regions, helping to balance national growth.

Conclusion

The global corporate tax race has shown that lowering taxes is an effective way to stimulate business activity and attract investment. The Trump administration’s Tax Cuts and Jobs Act was a major step forward, simplifying the tax code, lowering corporate taxes, and modernizing the system to be more competitive.

However, more can still be done to position the US as a leader in attracting global business investment. Further reductions in the corporate tax rate, permanent investment incentives, and simplifying tax structures would help ensure that the US continues to be a beacon for innovation and economic growth.