Jim Carter and Mieko Nakabayashi have an op-ed in the Wall Street Journal today about America’s declining role in international business and how corporate taxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. es are partly to blame. It quotes me:
What happens when the international economy changes but tax policy does not? That is a central question facing the United States and Japan, which have the highest corporate tax rates in the industrialized world. The need for action is acute, and emerging trends in global commerce demonstrate the need for tax policies that align with those trends.
A recent analysis by Thomson Reuters of business acquisitions showed that at least 484 U.S. firms, with a value of more than $43.6 billion, have been acquired by foreign interests this year alone. One factor in these acquisitions is the different ways in which nations impose corporate income taxA corporate income tax (CIT) is levied by federal and state governments on business profits. Many companies are not subject to the CIT because they are taxed as pass-through businesses, with income reportable under the individual income tax. es.
When a company is sold, the price is established by myriad factors, one of which is the tax structure facing the buyer. Corporations based in countries with taxes lower than in the U.S. can offer a higher price because of a smaller tax liability after acquiring the new firm. In which countries do companies have the built-in advantage over American firms in a bidding process? The answer is simple. All of them.
When the U.S. last cut its corporate tax rate in 1986, 218 of the world's 500 largest corporations measured by revenue were in the U.S. Today, that number is 137.
Similarly, the number of Japanese corporations in the Fortune Global 500 fell to 68 last year from 81 in 2005. While there is no single explanation for the drop, Tax Foundation chief economist William McBride tells us: "The common thread behind all of this is the U.S. corporate tax, which is the most punitive in the developed world."
Other nations are taking actions to welcome foreign capital into their economies. A 2012 analysis by PricewaterhouseCoopers conducted for the World Bank showed 133 corporate tax reductions since 2006. The cuts reflect a world that is recognizing the need to adjust tax rates to attract new investment and provide incentives for multinational corporations to repatriate overseas profits.
The U.S. corporate tax is the most punitive in the developed world, not just because the statutory corporate tax rate is the highest but also because the effective corporate tax rate is the highest or nearly the highest according to recent studies. Adding injury to insult, the U.S. applies this tax rate to the foreign profits of U.S. based multinational corporations (MNC), whereas most countries exempt foreign profits to a large degree. As Carter and Nakabayashi explain, this makes U.S. based MNCs an attractive target for foreign acquirers, because foreign ownership means often a large and immediate tax cut on foreign profits. For instance, Japan’s Softbank just bought Sprint and the combined company will be based in Japan, which has a territorial tax systemA territorial tax system for corporations, as opposed to a worldwide tax system, excludes profits multinational companies earn in foreign countries from their domestic tax base. As part of the 2017 Tax Cuts and Jobs Act (TCJA), the United States shifted from worldwide taxation towards territorial taxation. that exempts active foreign earnings. As a result, Sprint will no longer owe U.S. tax on its earnings outside the U.S. For example, if Sprint has operations in Canada, that means profits earned there will now be taxed at 26 percent rather than the U.S. 35 percent rate.
This dynamic has been in place for years but it has gotten worse each year as more and more countries reduce their corporate tax rate and switch to a territorial tax system while the U.S. stands still. For example, 15 of the 34 most advanced countries in the OECD have switched to a territorial system since 2000, and all but three of them have lowered their corporate tax rate. In that time, U.S. MNCs have steadily lost ground to competitors. As Matt Slaughter and Laura Tyson document, U.S. MNCs share of domestic investment, employment and output have all declined since 2000. Total U.S. employment by U.S. based MNCs declined in the 2000s after a 24 percent increase in the 1990s.
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