Three Experts Weigh in On International Tax Policy Proposals

As policymakers consider changing America’s tax code, they must think through the unintended consequences to these changes and how any modifications would affect the competitiveness of U.S. companies — and the tens of millions of Americans who work for them.

At a recent panel, hosted by the Alliance for Competitive Taxation, three of the nation’s top experts explained what the proposed federal corporate tax increases would mean for American businesses:

“Prior to 2017 kind of everybody agreed that we had to do something. The reason we needed to do something was the acknowledgement that it’s a big world and we’ve got these foreign competitors. … The level playing field [is] one where you want your country not to be too different from what other countries do.”

- James Hines, Professor of Economics, University of Michigan

For years, America had the highest corporate income tax rate in the world and an outdated international tax system that made it difficult for U.S. companies to compete in foreign markets. This tax system carried over from the last century gave foreign companies an edge in a crowded global economy.

In 2017, the U.S. brought its tax rate in line with other industrialized countries and modernized its international tax rules, a move that set up American companies, and their workers, to succeed. In 2018, the first year with the new tax rates, U.S. multinational companies grew their U.S. employment, U.S. capital expenditures and U.S. R&D investment by more than the previous 20-year average.

The importance of success in foreign markets to U.S. employment and investment was analyzed in a study by Professor Hines and co-authors. The study found that when U.S. companies expand their operations outside the United States, they hire more U.S. workers at home, pay higher wages to their U.S. workers, and invest more in property, plant and equipment in the United States.

“If you increase the cost of doing business for U.S. companies, it’s going to make us less competitive. It’s going to make getting contracts a lot harder. It’s going to make trying to do mergers and acquisitions much more expensive. It’s going to make it hard for U.S. companies to be able to do business on a global basis compared to our competitors, if we are experiencing these additional taxes.”

- Cathy Schultz, Vice President, Tax and Fiscal policy, Business Roundtable

Proposals to raise the corporate income tax to even 25% or to increase taxes on the foreign operations of U.S. companies will give an advantage to our foreign competitors, as American companies would spend more on taxes and have less to spend on jobs, investment and innovation.

At a 25% federal corporate tax rate, the combined federal and state rate would be 6 percentage points higher than the OECD average.

The U.S. is currently the only country in the world to impose a minimum tax on the foreign income of its companies. That means when a U.S. company competes abroad against foreign companies, it is shouldering a tax burden that its competitors don’t face. While the OECD is currently debating a proposal to create a global minimum tax, any OECD agreement won’t be compulsory for countries to implement, meaning many of our biggest competitors such as China will be under no requirement to adopt such a tax. Even under the best case scenario, it will take countries 2–3 years to implement their own global minimum tax, creating a disparity in the cost of doing business for U.S. companies for years to come.

“To the extent that U.S. multinationals bear additional taxes on their foreign investment, which other companies which are under a territorial regime do not bear, U.S. multinationals, of course, face additional costs. This can affect their ability to compete in foreign markets. It can also bear on the ability of U.S. multinationals to invest domestically. … And if this tax disadvantage is large enough, then U.S. multinationals will have an incentive to become non U.S. multinationals, in other words to invert, and this is usually by some kind of merger and acquisition with a foreign company. … Long term if you try to tax U.S. multinationals much more heavily, I think they will either find a way to invert or it will certainly drag on the dynamism of the U.S. corporate sector.”

- Thornton Matheson, Senior Fellow, Urban-Brookings Tax Policy Center

Lawmakers are considering raising the minimum tax American companies pay on income earned from foreign operations. No other country in the world has a foreign minimum tax on their companies, putting U.S. businesses at a disadvantage.

Increasing the GILTI rate will exacerbate this disadvantage, making it even harder for U.S. companies to compete on the world stage and limiting the funds available for hiring American workers and reinvesting at home. Even in light of the fact that the OECD is actively debating a global minimum tax that would take years to implement, we are currently discussing a U.S. minimum tax that’s nearly double the proposed OECD rate and that would go into effect in a matter of months, creating a steeper unlevel playing field.

Click here to watch the panel hosted by the Alliance for Competitive Taxation: https://actontaxreform.com/media-center/current/posts/august-5-2021/

The Alliance for Competitive Taxation promotes U.S. jobs, investment and rising incomes through the establishment of a competitive U.S. tax system.