Corporate Tax Policy Comparison Between the United States and Ireland - Research Paper Example

Corporate Tax Policy comparison between the United s and Ireland: Which policy is more effective in creating jobs and revenue? Instructor: Subject: Corporate tax policy comparison for United States and Ireland in terms of structure and ideas. In this paper, I will argue that the corporate tax policy for United States and Ireland differ in relation to structural and ideas theories in terms of job creation and revenues generation. Tax policies have been seen to differ from one country to another. Amongst the reasons predisposing to this difference being the tax rates set by individual countries. To be on top of the race in the competition of economic conditions, countries have applied policy that attract foreign investors and increasing exports, two engines that leads to strong performance in a country. The overall gain in structural policy and views or ideas incorporated here, creates more avenues for job creation and generating more revenues in an individual country. United States of America tax policy depicts very high rates since the twentieth century while that of Ireland portrays low rates in their tax policy. The difference has been determined in the corporate tax rate that is over 20% between the two countries. Economists have argued that the moves have had differences in the global competitive race. United States ranks behind Ireland in attracting foreign investors through corporate tax policies established. Theory of structure Illustration one: Structural corporate tax policies for USA and Ireland Ireland: 12.5% on trading (business) income, and 25% on non-trading income. United States: Federal 15% to 35%. States: 0% to 10%, deductible in computing Federal taxable income. Some cities: up to 9%, deductible in computing Federal taxable income. The Federal Alternative Minimum Tax of 20% is imposed on regular taxable income with adjustments 4. United States of America corporate structures The structural corporate tax rates in the USA are very high. These have left the country facing many challenges in sustaining the economic standards at a time when the inflation is high and adverse economic conditions are looming all over the world. The value of the dollar is reducing with the passing years since there is reduced income generation and the spending by the government has increased. With the high standards of living, the unemployment rates have risen to 30%. The effects substantiating to this have been argued by Paul O’Neil, the treasury secretary, towards high corporate tax rates that has discouraged financial investors from other nations. He argues that the move would make United States more formidable from this simplification. Hubbard, the chairman of the president’s council of economic advisors emphasized on the same move as O’Neil in tax policy reforms. His case was however for reducing the corporate taxes and capitals gains. He also suggested that an alternative minimum corporate tax rate should be adopted. The international tax and trade policy needed to be readdresses as a perspective from the tax foundation. According to Jim Saxton, the chairman of the Joint economic committee of the United states congress, in the year 2005, the tax policy in the nation were unfairly imposed on business revealing very high rates and large costs to the business. He argued that these tax impositions were not necessary and reforms should be undertaken in the tax policy. Close to a decade later, much has not been seen to have taken place. The tax rates are still very high, foreign investment low and further the nation seeks other avenues of generating income. The tax structure of the United States has been viewed as a complex and very ineffective in application. The federal government bodies enjoy reduced rates while the business ventures accrue to very high costs payable to tax authorities. The capital gains are not recognized as allowable deductions in the recent times following their removal from the tax policy. They are treated as taxable part of the income. The United States has adopted other methods of generating incomes as opposed to increase tax rates further. These include oversees investments, lease arrangements, transfer pricing amongst other moves. The complexity of the tax policy has been seen to be a loss to the United States as opposed to the intended gains. Business and other entities are operated under very high costs and the resulting effect is detrimental to the economic conditions. Manufacturers are seeking other countries where they can shift the production and undertake operations at reduced costs. Such measures are seen to be shifting production from USA to other less taxing countries like the Ireland. The reforms in tax policy should aim at attracting foreign investors and not discourage them. The fact is that if owners’ of any individual nation do not have confidence in their structural policies, the foreigners will follow suit. The government proposition of transforming innovations to new products was seen to be a move for job creation and adding value to the economy. However, the very same economists, the masterminds of the research, suggest that these knowledge based ideas can and will only be effective if the operational rates are reduced. The way forward by the government leaves unanswered questions to its people. First where is the source of capital for generating the new products and second how do they sustain themselves in the economic times with the high rates of taxes imposed. This has discouraged a great number of investors in the United States. The Ireland’s government however has been seen to have different measures all together. The development agendas in the United States have been politicized and the effect is not tangible. The economist and the government politics differ in that the private firms are influenced greatly by the tax authorities. The economists argue that these firms should be left to respond independently and spontaneous with the economic conditions. This move would open up more avenues for revenue and job creation. The treasury department declared that the last forty years has seen companies apply the basic structure of the international tax policies. Businesses and Companies are generally taxed on any income that they earn. Since 1960, globalization has further heightened the situation. The tax rates have been ever increasing. The situation today has become even worse that every company irregardless of its size, is affected one way or the other by international corporate tax rates. Any income earned, whether domestic or internationally, is subject to high structural rates of corporate taxes. The report also shows that when the foreign rates are less than 35%, the United States corporates stands at gaining tax incentives. Companies are seen to be taking advantage of the lower rates from other countries to earn profits. The tax department in the United States has gone further to impose uncompetitive costs to its domestic firms higher than its foreign competitors. This jeopardized the economic status of the whole nations because the states discourage full potential of investment5. The United States corporate tax system has discriminatory measures against capital investments. Corporate investments are favoured over incorporate investments. An example is shown through individual investment in real estates compared to a Company’s investment in stocks or other assets. There is bias over the treatment of individual investment over that of the company. The individual investment is more favoured over company’s investment. Another measure is on the treatment of corporate debts over equity. Outstanding debts have an interest charge that is an allowable expense i.e. the loan interest amount is deducted from gross revenues of the company. On the other hand, corporate equity investment is subject for taxation purposes. The final measure has been analysed as discriminating between foreign owned companies and the domestic companies. The foreign companies enjoy reduced international rates while domestic firms apply the high rates of corporate tax. This leads to reduced income base for the government due to the resulting shift from domestic to internationally owned firms. The reforms that have been suggested are creating opportunities for fair taxation on investments and savings. A consumption based system approach is seen to be more effective than the income based system. The savings and investments should not be included in the income systems. Returns from savings and investment can however be included for taxation purposes5. The US tax system has been practiced double taxation on the companies’ profits. This is where the profits are charged both at the corporates level and then the individual’s level. Taking an example: if a company makes $1000 pre-tax profits and it is in the 35% tax bracket, then the corporates tax payable is 350 US Dollars. The remaining balance of $650 can be reserved or reinvested. If the management decides to declare dividends, the shareholders are subject to paying individual income taxes. A shareholder within the income tax of 15% is liable to pay $97.5 to the tax authority. The resulting figure to the government is 44.75% of tax paid to the US tax system i.e. individual tax of $350 plus corporate tax of $ 97.5 amounting to $447.5. By dividing this figure with the profits, it generates 44.75%. The cultural aspects from investors show a trend where individuals prefer capital investment in equity than in debts. This is because capital gains have reduced tax rates. On the other hand, corporates prefer debt financing since the interest rates are tax allowable. Reforms suggested are adopting a comprehensive business income tax (CBIT), which scraps the individual taxation levels. The US tax system should integrate the two taxation levels. Emphasis would be on adopting the corporate tax rate1. The Institutes of National Manufacturers in the US has posed its concern on the treatment of manufacturers. The US tax system charges manufactures on their worldwide incomes. Amongst the cited structural costs imposed on the manufacturers are the excessive corporate taxes. These together with the high energy costs, escalates the charges for a company. The cost burden on the manufacturers to date is the most severe of the structural costs. The true burden is not towards corporate taxes but on the individuals. The resulting effects are reduced wages, high costs of products and services and further lowering the rates of return on investments. The institution has reviewed that the shift to countries with lower tax rates has resulted to reduced costs and expenditures for these companies. The United State system discourages domestic investor from expanding rather they are seeking oversees measures to curb the high costs. Ireland structural corporate tax system In Ireland, a total different scenario is depicted in the corporate tax structure. In illustration one above, the corporate tax rates is as low as 12.5% for trading income and 25% for non-trading incomes. The low tax rates have had controversial views all over the European Union. Unlike the United States that adopts very high corporate tax rates, Ireland move has been a steady low corporate tax on business income. To extend the knowledge on the tax base in Ireland’s system, the income generated by a business is divided into the two portions i.e. trading and non-trading incomes. United States condenses all the incomes for a company as one comprehensive income i.e. irregardless of its source. Critics have tried to force Ireland’s government to raise the tax rates, a move that was followed by no responses. The government instead forecasts on the impact of the reduced tax rates towards attracting foreign investors. This will in turn lead to increased exports, higher employment rates; less costly products and service deliver; in turn improve the economic conditions of the whole nations. Over the years, the European Union has observed that some countries are following suit from this move of Ireland’s tax system. The United States manufacturers are among but a few of the nations that seek oversees cheaper investment rates like those of Ireland’s tax system. According to Industrial development agency (IDA), the move by the United States has been explained towards the low corporate rates for manufacturing. The rates were as low as 10% before the forced pressure and criticism from other states, which saw a slight reaction in 2003 of 2.5% increase i.e. harmonizing the tax rates in all sectors of its economy. The manufacturing firms are even going to high heights in hiring very skilled labour and high wage rates in the country. As a result they get to produce and manufacture at low costs. The cultural trend from the United States’ Government back in 1980 of lowering its individual income tax rate hence broadening its tax base was meant to set an example for other nations. Ireland adopted this but instead put focus on lowering the corporate tax rates. The low tax rates are seen to be in competition with highly taxed corporation in Britain, Canada, Australia and Germany, are just but a few mentioned. The move has been viewed as being unfair causing downward trends in the global competitiveness race. Transparency and simplicity is seen in the tax system of Ireland unlike that of the United States. US tax system is complex and unfair to its domestic manufacturing companies. The Ireland’s system harmonizes both domestic and foreign investors in tax rates. This has opened avenues for increased developmental phase in the nation. Its low rates apply to a wide base unlike that for the US that is high and attracting a narrow base. In 2008, Ireland collected tax as a percent of the gross domestic product of 2.7% compared to that of United States of 2.4% 5. The National recovery plan in 2011 states that: the low rates regime for Ireland not only attracts foreign investors, but also plays a big role in fostering domestic entrepreneurs. Foreign direct investments (FDI) contribute a big portion on Ireland’s government’s earnings. There is actually over reliance of FDI in Ireland. The tax regime has been maintained since the twentieth century. This plan reaffirms the government’s position on maintaining the low corporate tax rates the key to its increased growth for the past decade. In 2008, the corporate tax revenues paid from large companies totals to 75% of the net revenue in Ireland. The recession period has not affected this nation rather its revenue continues increasing year by year. Unlike in the USA, the high tax regime has experienced a shift from domestic investments to oversee. The vital organ of revenue collection for any country is undermined in the USA as compared to Ireland. Discouraging domestic investments would results to detrimental effects to the economy of United States unless other reform measures are adopted. As much as praises may be given for the low regime, other factors need also be considered here. A comparison with other tax rate in the country depicts a very high rate for Value added tax of 21% and a significant increase in individual income tax by 8.5% in the year 2009. This puts the country at very expensive economic state which can further discourage foreign manufacturers. Nevertheless, the low rates continually hinder manufacturers’ decision over the other high rates of VAT and individual tax rates. A comparison of the treatment of double taxation aspects in the two nations reveals that both apply individual income tax, corporate tax and a further capital gains tax on its companies’ profits. The treaty for double taxation by Ireland with the European Union was affected on 2008. Ireland applies a rate of 25% on all capital gains and 40% for certain foreign life insurance policies. Unlike the United States that assumes abundance of capital amongst potential investors, the case is different in Ireland. Ireland promotes investors by offer the best corporate rates for any company to thrive while making substantial amounts of profits. The tax haven in Ireland has been experiencing wars to date. The government has signed a treaty with the European Union in regards to adherence with other member countries. The Union expects Ireland to raise its rates to a level of 30%, a move that undoubtedly is likely to occur. This year has seen a lot of pressures exerted on this government’s tax system. Economists however argue that the outcome is likely to be the same as in 2003. The government will hold firm to it’s believe of low interests rates for the Irish people offer more benefits in the long run. Predominantly, discussions are underway showing a broad array of ideas for the way forward of the Irish people. The theory of ideas In the United States, much has been laid down on the table beginning with the president Barrack Obama. With the global economic crisis, this regime has imposed a drag on the economy. The president and other economists have given their views in reducing the high tax rates. This is intended to make United State a more competitive state as compared to its trading partners i.e. Europe, Germany etc. These reforms are however, taking too long to implement, a comment from O’Neil’s statements. The Congressional Budget Office (CBO) stated, in a paper in 2003, that the high corporate tax rates are likely to distort allocation of resources. This has not only been in the United States but further to other countries that heavily depend on the super power. The Industrial Development Authority has also contributed their views on these rates. IDA states that the high corporate tax rates in United States are among the highest in the world. This has been discouraging domestic firms to expand or even start their operations. Foreign investments are at minimal rates compared to other nations. This move has been viewed to be more detrimental to the economy at large. IDA suggests a reduction of the corporate tax rates to as low as 15%. The 35% rate has been criticized in causing very high operational costs for a company in United States. The before tax earnings of manufacturers is often quite high only to face the exaggerated rates in the corporation tax. The corporations have the opportunities to choose the country to invest in6. USA has further adopted ideas of expanding its income generation avenues through measures like transfer pricing, lease arrangements etc. Unlike Ireland that relies heavily on foreign direct investments, US tax system seems to depict otherwise. The gross domestic product as a percentage of corporate tax in United States has reduced from 4% in 1965 to 2.9% in 2009. The government $1.4 trillion tax base is budgeted to brim, with its high spending. Ireland and ideas in taxation Ireland is undoubtedly one of the biggest competitors in the world in economic situations. The country has adopted low interest rate as means of shifting power from within to other countries. The state has come up with strategies of boosting the economic status of the country through foreign direct investments. The adoption of this tax regime was due to reasons that predispose the state to limited ways of attracting foreign investments. These include limited natural resources as well as geographic barriers. The multinationals tactic has been adopted to increase the revenue in the country. United States is one of the biggest targets for Ireland and has resulted to a great gain for Ireland. Studies such as Vales in 1985, have analyzed that US firms have been shifting their investments to other jurisdictions of lower rates. The rationalism behind adopting the low rates dates back in the 1920s. The government has been reluctant to impede high taxes when the low tax offers more benefits. The tax rates are one of the critical issues alone that determines investment by manufacturers in different countries. The signing of tax treaties by Ireland has been done up to date. The final review in the national plan in Ireland indicates the signing of double taxation treaty with the European Union. The Ireland’s government does not however intend to change tax rates. The treaties are the only means of creating stability in the tax world for multinational companies who extend operations to other nations1. Ireland abolished the strict rules imposed by the British government back in the 1960. The strict rules had caused a tremendous down fall on its economic growth let alone the unemployment’s rate. It further allowed for emigration. The tactic was to abolish the high taxes in order to attract foreign investments. In 1980, the government established a 10% rate on profits earned from manufacture of goods in Ireland. The abolishment of export taxes was also implemented. All these ideas were implemented and have resulted to Ireland becoming the largest export in computer softwares. The country has created job opportunities in the country and the booming economy is admirable. Corporate tax policy for the two countries in relation to creation of jobs and revenues: The best policy amongst the two countries is the low corporate tax regime. Since the abolishment of imposed rules from the British government, Ireland has had a global ideal position in attracting foreign direct investments. The low tax rates have encouraged many multinational firms to pitch camp their investment in the jurisdiction of Ireland. United States is among the biggest investors in Ireland. Ireland is still generating jobs and according to an article from the RTE News web article nearly 77,000 jobs were produced in the Republic since this past February which made nearly a 4% increase in national employment2. Thanks to external inhabitants they account for over half the rise in more work. The Irish hire nearly 1,500 willing workers mostly every week which is over one fifth of a rise in new job openings in the past 12 months, and the underlying fiscal stance grew stouter in the summer as enhanced returns from its extremely low business tax and greater proceeds ascending from earnings tariff climbs forced the Republic revenue to advance on its objectives. A comparison of the gross domestic product as a percentage of corporate tax shows that Ireland stands at 2.9% while United States lags behind with 2.4%. More American companies choose to look for outside assistance and worldwide resourcing because they recognize that when they have bulk and other items manufactured overseas and shipped to them or straight to customers rather than afford to develop their own companies. Kept up to pay the Americans a fair pay made by the company is saving on employment and laboring hours because there are hiring companies with willing workers from the people of Ireland, Mexico, Japan, and China United Kingdom, and other countries that internationally do business. Moreover this really puts a damper on the people that need work in many towns where the industry was alive in America but is no more and there are less and less jobs for the American man and woman. Ireland is in competition with other nationals that are lowering the tax rates. Nevertheless, the government has adopted measures in increasing tax deductions for computer softwares developers. The research and development sector is gaining more fame in Ireland. This is meant to stabilize the income creation for the nation. United State is reluctant in reducing its corporate rates at a time when the economy is very unstable. US government has instead adopted other means of generating revenue in the country. Bibliography Avi-Yonah, R., Globalisation and tax competition: implications for developing Countries. 2001. Irish tax system, http://www.omahonydonnelly.ie/irish-tax.htm, retrieved on 6/12/2011. Michael J. Graetz and Alvin C. Warren Jr. “Integration of Corporate and Individual Income Taxes: An Introduction.” Tax Notes. September 27, 2009. RTE News. “CSO: Ireland Still Creating Jobs.” RTE News. 15 May 2007: 1. Web 19 Nov. 2011. http://www.rte.ie/news/2007/0515/jobs.html. Scott A. Hodge, U.S. States Lead the World in High Corporate Taxes Tax Foundation, 2008. Tax policy centre, http://www.taxpolicycenter.org/briefing-book/key-elements/business/statutory.cfm retrieved on 6/12/2011. Read More