Corporate Tax Reform on U.S. Industrial Economy




The business landscape in the United States has historically been both favorable and positive relative to the rest of the world. Companies have thrived on the American consumer, the stability of the government, a strong U.S. currency, a balanced tax system, the workforce, abundant energy resources, and a trust that “fair play” will exist among businesses. When these dynamics are at work, the result is a strong economic environment. 

The U.S. has historically maintained a competitive advantage over other countries in these areas to one degree or another. However, over time, other countries have adopted certain business-friendly measures, cutting into U.S.-based companies’ share of the global economy. These changes have certainly impacted the U.S. manufacturing sector, though there has been a rebound of late. But, to grow and strengthen it further, some policy changes are in order. Specifically, tax policy is one area of weakness for the U.S., which President Trump plans to rectify. 

The Current U.S. Tax System for Business
Under the current system, the highest marginal federal corporate tax rate in the U.S. is 35 percent. It often surpasses 40 percent once state taxes are taken into account. This rate is the third highest in the world, with only the United Arab Emirates and Puerto Rico exceeding it. According to the Tax Foundation, the global average across 188 countries and tax jurisdictions is much lower, at 22.5 percent. 

U.S.-based corporations owned by foreign companies are bound by the same corporate tax rules on the profits from their U.S. business activities as U.S.-owned corporations. A second level of taxation may also be applied at the shareholder level depending on the method of distributing profits. 

To put it in a more specific perspective, here is how the U.S. federal corporate tax rate of 35 percent compares to other countries:
§  Germany: 15 percent
§  China: 25 percent
§  Japan: 23.9 percent
§  South Korea: 22 percent
§  United Kingdom: 20 percent
§  Taiwan: 17 percent
§  Mexico: 30 percent
§  Canada: 15 percent
§  Singapore: 17 percent
§  India: 30 percent

It should also be noted that Ireland has a corporate tax rate of 12.5 percent and reportedly grew its economy 26.3 percent in 2015, due largely to this competitive advantage over other countries. 

Proposed Corporate Tax Reform
President Trump campaigned on a promise to drastically reduce the tax burden on both businesses and individuals. In late April, his administration proposed an outline of the most comprehensive tax code overhaul since President Reagan, with the highlight being to reduce the top business tax rate to 15 percent. The fundamental basis for the overhaul is to stimulate economic growth, thus creating more jobs and expanding the nation’s GDP. 

It appears President Trump’s administration intentionally left out a lot of detail when it released its plan. It’s hoped this will allow the House and Senate to streamline the negotiation process to arrive at a final, detailed plan. The highlights of President Trump’s corporate tax reform plan include:
§  A top individual income tax rate on pass-through businesses (such as partnerships) to 15 percent
§  A repeal of the corporate alternative minimum tax and the 3.8 percent Affordable Care Act (ACA) tax
§  A one-time opportunity to repatriate corporate profits earned (and held) overseas at a 10 percent tax rate
§  Elimination of corporate loopholes that cater to special interests, as well as deductions made unnecessary or redundant by the new lower tax rate
§  Immediate expensing of U.S. capital investments
§  Adoption of a “territorial” tax system, which typically excludes most or all of the taxable income that businesses earn overseas

Beyond the lower rate, two ideas receiving a lion’s share of attention are the repatriation of foreign-earned profits and immediate expensing of new investments in U.S. capacity. First, by availing themselves of what is known as a “tax holiday,” U.S. companies could bring trillions of dollars held abroad back into the U.S. for investment into the domestic economy. Such a tax holiday has not occurred since 2004. 
Reference from  http://www.areadevelopment.com/business-climate/Q2-2017/what-corporate-tax-reform-means-for-industrial-economy-small-manufacturers.shtml

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