The US Treasury Secretary has suggested that the US is going to offer companies the biggest cut in their tax rate in that country's history. The rate will be cut from 35% to 15%. But, as anyone who has some knowledge of tax knows, the tax rate is not the only factor in determining the tax that a company pays. The tax base has an enormous impact as well.
The details of the US tax reform are still vague. We only really know the new headline rate and the fact that there will be a special low rate for profits repatriated from offshore. Five profound messages do, however come from this.
The first is that corporate lobbying, which demanded both these changes, has been rewarded. I think we can be sure less tax will be paid as a result.
Second, the repatriation profit rate proves that offshore tax abuse has provided a permanent reward to the major corporations that have undertaken this activity.
Third, we know that when George W Bush permitted such a low tax on repatriations during his time in office it did not promote investment or growth. It did instead let profits flow to shareholders by way of dividends or share buy backs at low rates. I am sure the same thing will happen this time.
Fourth, whatever anyone thinks about the Laffer curve we know that cuts to rates of around 35% reduce revenue. This has unambiguously happened in the UK. If adjustment is made for the growing number of small companies in the UK corporate tax revenues lag far behind growth in all other taxes because of falling rates. The US will have to learn this lesson the hard way.
Fifth, this means that Trump has either announced a big increase in the US deficit or he has hit those dependent on the US Federal government to cuts. These things are not neutral.
But there are other consequences too.
This encourages tax competition, and that is bad news for the world at large.
And this does not mean US companies will now pay 15% tax. They have not been paying 35% when that has been the rate. A rate around 23% gas been more commonplace. There is now no reason to think they will pay 15% either. In fact if the differential remains the rate will be very low.
Finally, do not also think that this move is without ramifications for the UK. The current government has wanted to claim the lowest corporation tax rate in the G7. Expect a cut here then. It's not only in the US then that wealth would be flowing upwards as a result of this decision.
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If the multinationals continue going down this route they will end up destroying the markets where they make money. It’s like being a member of a golf club and not paying the required green fees and still expecting the course to be kept in great condition (it won’t happen).
Here’s Stiglitz commentary earlier this year:
http://edition.cnn.com/2017/01/16/opinions/eight-men-with-as-much-wealth-as-half-the-world-stiglitz/
I remember hearing a couple of years ago that Tim Cook (Apple CEO) tore into climate change deniers at a shareholder meeting and said that if they continued to deny basic scientific facts, they needn’t invest in Apple, as he regarded their actions as completely irresponsible (or words to that effect).
Do you think Apple are going to take a similarly enlightened approach to economic facts and start paying their fair share of taxes to ensure growing inequality doesn’t threaten the economic environment in which they operate,as Stiglitz points out?
After all, the anger and resentment produced by this growing inequality in the US was exploited by the unscrupulous right to get Trump into power, and he’s a climate change denier. Perhaps Tim Cook might like to think about this a bit more!
How people tolerate corporations paying less tax than them is something I will never understand.
A Government that does things like this should never be able to get into power never mind retain it.
But there seesm to be a backlash against this in the USA according to the Guardian at least.
It’s interesting that people already tolerate the fact that while they are taxed on their income, companies are taxed on their profits: whatever they have left over after the year’s spending.
The equivalent would be if individuals were taxed only on their savings. When I looked it up recently, there’s maybe one or two countries in the world that tax corporations on their revenue – at a very low rate obviously.
Sorry: I disagree
Everyone is taxed on their income after allowable expenses
It’s just that employees have few expenses
The self employed do and are allowed to offset them, just like companies
Richard, many employees have expenses, just they’re not allowable
That’s not wholly true
Many are not aware that even expense reimbursements from employers are tax deductions
The point is that the tax base for income tax and corporation tax is not gross revenues. Almost every taxpayer is allowed deductions against their income to determine how much of it is taxable. As you acknowledge, even employees can claim deductions for expenses which are wholly, excusively and ncessarily incurred in the performance of their duties.
Is the suggestion that we should abolish income tax and corporation tax and instead companies and the self-employed should be taxed on their gross revenues, with no deductions? A turnover tax or sales tax? Like VAT?
The writer Barry C. Lynn (author of: Cornered: The New Monopoly Capitalism and the Economics of Destruction ) wrote: ‘“by the 1950s managers were wont to present themselves as ‘corporate stewards’ whose job was to serve ‘stockholders, employees, customers, and the public at large.”
I guess this is another manifestation of the loss of real word product/service/worker/customer relationship that has developed over the last 40 years. it is staggering that this supply side mania is still believed in. The Americans seem suckered by it and as we’re the 51st state ……
As you say this cut to 15% will bring huge pressure for other major economies to lower their rates, the EU in particular will not be happy!
It also puts pressure on Ireland at 12.5%, can they lower they rate without a huge fight with the EU?…….and if not will their economy suffer as US companies funnel their money direct to the US?
No way will the UK rate stop at 17% now, at least 15% if not 14% is on the cards!
All round an excellent prospect, long overdue…
You can at least be happy RM that the Tax Havens will be hit, the lower the US rate then the less incentive to be clever and route offshore!……
And how will you reconcile your conscience with the deaths that will follow from the revenues that will be lost?
Or do you not have one
And please don’t say there will be growth: corporation tax cuts in the UK have clearly not delivered growth
The trouble with lower taxes on corporations is that it creates a trickle up effect that exaggerates inequality, and rising inequality always ends in one of two ways, economic crisis or political crisis. We have seen both in recent times.
Corporations should be on a level playing field with individuals, a self employed person should have the same tax liabilities as a large multinational, size should not buy advantage here.
I am not sure I wholly agree: corporations should pay more for the privilege of limited liability
The proposed tax cuts mask the fact that the other aspect of Trump’s job plan the Border Adjustment Tax has been dumped by his own party. So all that’s left of this presidency after a 100 days is the same old same old, a re-run of trickle-down economics taxation policy used to benefit the socio-economic elite and in real terms nobody else.
http://www.alternet.org/its-official-koch-brothers-have-killed-trumps-job-plan
Agreed
But the BAT was worse….
I believe that Mr Trump faces an uphill task in persuading the Republicans – YES, THE REPUBLICANs – in Congress in agreeing to this cut in the corporation tax along with a reform in the tax code. They wonder how a massive reduction in tax revenues is compatible with an equally massive increase in spending on infrastructure and defence (and a “big beautiful wall”)while at the same time avoiding a several trillion dollar increase in the national deficit. Chucking 60 cruise missiles into an almost deserted airfiels in the desert, and a 20,000 lbs bomb into a network of caves in Afghanistan to kill 30 terrorists does not come cheap – $1.5 million per cruise missile, and $17 million per MOAB. Trump supporters may throw their sweaty nightcaps in the air every time he sends a carrier force the wrong direction to threaten the fat boy dictator in Korea, but in fact Mr Trump is losing support and approval ratings even among the redneck “deplorables” in flyover country that had expected him to Drain the SAwamp and make America Great Again. It is quite likely that the reduction in corporation tax ain’t gonna happen.
Mike, I hope you’re right, and this wretched fool is out of office ASAP, (by whatever means), and replaced by somebody/anybody who has some suitability for the office of the American presidency.
For an insightful and realistic evaluation of what nonsence Trump’s proposal is I’d recommend people watch Lawrence O’Donnell’s eight minute analysis on MSNBC. It also includes comparison with Reagan’s truly revolutionary reforms (which garnered both Republican and Democratic support). The link is: http://www.msnbc.com/the-last-word
and the clip to watch is ‘Lawrence on Trump’s disastrous one-page tax proposal roll out.’