US Corporations face one of the highest corporate tax rates in the world and one of the few corporate tax systems that apply a credit system for foreign business earnings rather than an exemption system, both of which a routinely blamed for the reported over $2 trillion of trapped earnings US corporations have outside the US. There is bipartisan support for corporate tax reform in the US, but real legislative progress so far has been elusive. At Taxand’s Global Conference 2016 in Dublin, Martin A. Sullivan from Tax Analysts provided an overview of the potential approaches to US tax reform, the past tax actions of newly elected presidents early in their terms and what that might tell us about prospcts for 2017, and the tax platforms of current presidential hopefuls.
There is universal agreement amongst economists that corporate tax is the most harmful form of taxation for a national economy. It reduces overall investment by both acting as a disincentive to economic activity and by reducing funds available to corporaitons for reinvestment from their profits, discourages inbound investment and adds compliance burdens and complexity.
Despite the US being a pro-business economy, it has the highest effective corporate tax rate at 35%, compared to the OECD average of 25%. The US has therefore become increasingly uncompetitive for businesses. Previous attempts at US tax reform, such as the Tax Reform Act of 2014, have failed to take off and after years of attempts, it seems like the US has hit a tax reform brick wall.
Tax reform in the US is extremely difficult in the current environment. If the US were to bring its corporate tax rate down to be in line with the OECD average, it would most likely need to remove nearly every tax break currently available to US corporations as it lacks flexibility to reform other areas. For example, the US has arguably already reached a political ceiling with individual tax rates.
We are now in a situation where the US has bipartisan consensus, with both parties accepting that there is a need for US corporate tax reform, but with legislative in congress and neither side agreeing on the amount of revenue that should be raised from taxes, the US is a long way off from addressing that need.
While the tax platforms of the remaining presidential candidates are very different, those differences have not generated any meaningful tax debate. Trump is proposing huge tax cuts, including a cut of the corporate rate to 15%. Ted Cruz is proposing a drastic overhaul of the system with a 16% “Flat Tax”, essentially a Value Added Tax, and Hilary Clinton is proposing tax increases on the wealthy and multinationals whilst also strengthening the anti-inversion rules.
The future for US tax policy therefore remains uncertain. More than ever before the US needs corporate tax reform or risks losing jobs and investment. However the political situation means it is tougher than ever to achieve change with rising debts, deficits, gridlock in congress and rising populism. As such, despite the need for a comprehensive US tax reform, the US is unlikely to see it for some time to come.