The US Corporate Income Tax Conundrum - Essay Example

United States corporate tax is the highest among the developed countries, and it is currently pushing to have its resident corporations pay taxes on incomes from their worldwide operations. The rest of the developed countries and the developing countries use the territorial system, exempting their resident companies from paying taxes on their foreign income. High corporate taxes are hurting workers through lower wages and decreased productivity as US resident companies seek for countries with lower taxes and offer a high rate of investment.
High corporate taxes weaken growth and make American companies uncompetitive globally. To absorb a reduction in the corporate tax rate, the US government will have to extend the corporate tax base and remove or scale down the corporate tax expenditures: accelerated depreciation, domestic manufacturing production deduction, and the research and development tax credit, which reduce capital costs, increase new investments, and encourage job creation. This will increase the cost of new investments and reduce wages and productivity. Therefore, America should not increase the corporate tax rate and should retain the territorial system, but also combine it with worldwide territory to ensure the government does not lose revenue.
Question 2
The biggest factor that determines Foreign Direct Investment in the country is GDP, a study of 46 countries established that there is a direct correlation between corporate tax rates and foreign direct investment. Countries with low corporate taxes attract more foreign investments compared to countries with higher rates. To increase profits, Multinational Enterprises (MNEs) invest in countries with favorable economic conditions and tax rates. Empirical evidence for Organization for Economic Co-operation and Development (OECD) countries shows negative FDI inflows and increased taxation.
Question 3
There is increased lobbying for the Internal Revenue Code to be revised, for simplification of corporate and personal taxes. Globally there has been a shift towards the flat tax regime, where citizens and businesses are charged at a harmonized tax rate, with everybody paying an equal amount. Advocates of the flat system argue that many benefits accrue from using this system, the system itself is very simple, with easy-to-comprehend tax codes, and both the taxation authority and the taxpayer benefit. Governments primarily adopt the system, as an enticement to attract companies and the general citizenry to pay taxes. Because everyone will be paying a certain fixed percentage of his or her salary, there is a sense of fairness perpetuated by the flat tax prospect. A system that can de-politicize the tax code is always welcome to the masses and corporations, there are no undue preferences or penalties to companies imposed by legislators in a flat system, they simply don’t have the power. Read More