Corporate tax reform is one of the most controversial and debated issues in the U.S. political and economic landscape as of 2023. The term itself refers to the changes in the rules and rates that apply to the taxation of corporate income, both domestically and internationally. These can have significant implications for the competitiveness, growth, and innovation of U.S. corporations, as well as for the fiscal balance, income distribution, and economic welfare of the American government and society.
The current U.S. corporate tax system is widely criticized for being outdated, complex, and inefficient. In the above context, several important issues need to be addressed.
As of 2023, the federal corporate tax rate is way too high. Currently, it makes 21%. The above-mentioned tax rate was set under the Tax Cuts and Jobs Act (TCJA) of 2017. Before that, it amounted to 35%, with four brackets ranging from 15% to 35%. Don’t forget that the TCJA also eliminated the corporate alternative minimum tax (AMT), a parallel tax system that required corporations to contribute at least 20% of their income in taxes, irrespective of credits and deductions. Still, even after the TCJA, corporate tax rates in the USA remain some of the highest amongst advanced economies, as the average corporate OECD tax rate is 23.4%.
The basis of the U.S. corporate tax system is worldwide taxation. It means that local corporations are taxed on their worldwide income, regardless of where it is located or earned. Yet, the jurisdiction also allows U.S. corporations to defer the taxation of their foreign income until it is repatriated, which creates an incentive for U.S. corporations to keep their foreign earnings offshore and avoid taxes back home. To address this issue, the TCJA introduced some changes to the U.S. corporate tax system:
- TCJA establishes a 15% minimum tax on the book income of major U.S. corporations that pay little or no federal income tax while at the same time reporting considerable profits.
- TCJA raises the tax rate on global intangible low-taxed income (GILTI) from 10.5% to 21% and at present calculates it on a country-by-country basis and not a global average basis.
- TCJA eliminates the deduction for foreign-derived intangible income (FDII), which is intended to encourage exports and domestic innovation.
- TCJA reinstates a 10% base erosion payment tax.
- TCJA replaces the current system of deferral and repatriation of foreign earnings with a 21% minimum tax on all foreign earnings, regardless of whether they are repatriated.
- TCJA strengthens the anti-inversion rules designed to prevent U.S. corporations from relocating their headquarters to low-tax countries to avoid U.S. taxes.
Still, these changes are not enough to align the U.S. corporate tax system with the international standards and norms that are based on the principle of territorial taxation. The latter can reduce its complexity and distortion, eliminating the double taxation and the incentive for profit shifting and tax avoidance.
The U.S. corporate tax system is regrettably riddled with loopholes and preferences that create inefficiencies and inequities. They are provisions in the tax code that allow certain corporations and industries to reduce or avoid deductions, credits, exemptions, and exclusions. These loopholes and preferences are capable of distorting the allocation of resources and creating unfair competitive advantages for some industries or corporations over others. Besides, they are likely to reduce the revenue and the progressivity of the corporate tax system, while increasing its complexity and compliance costs.
Given these issues, there is a need and a demand for corporate tax reform in the States. However, it is also a challenging and contentious issue that involves various trade-offs, conflicts, and uncertainties.
We all recognize that the corporate tax reform challenge is far from being simple. Such a reform can have different effects on the revenue and the competitiveness of the nation’s corporate tax system, depending on the design and implementation of the reform. For example, although lowering the corporate tax rate may increase the competitiveness of U.S. corporations, it can also reduce the government revenue, unless offset by broadening the tax base or increasing other taxes. Conversely, raising the corporate tax rate may increase the revenue of the U.S. government, at the same time reducing the corporations’ competitiveness. This way, finding a balance between revenue and competitiveness is a key challenge for corporate tax reform in the U.S.
Affecting the interests and preferences of corporations, industries, taxpayers, voters, politicians, and policymakers alike, the said corporate tax reform is a highly political and partisan issue. No doubt, different stakeholders may have conflicting views and opinions on its goals, methods, and outcomes, and they may lobby and influence the legislative and regulatory process of the reform. In this situation, political consensus and cooperation are crucial for its success.
The U.S. corporate tax reform is not a one-time or a static issue but an ongoing dynamic process, as adaptation to the changing and uncertain environment is required, both domestically and internationally. The environment that affects the corporate tax system includes economic conditions, technological developments, social trends, legal frameworks, and global standards. These factors can potentially create new opportunities and challenges for the corporate tax system. Sure they are capable of affecting its effectiveness and efficiency as well. For the above reform to have a chance to get ahead, it needs to be adapted to the changing and uncertain environment.
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