Reuters reports that despite Biden’s proposed global tax plan hike, U.S companies still pay less tax than their international competitors. This conclusion stems from an analysis done by Reuters which involved filing over 100’s companies. The analysis done by Reuters discards the argument presented by company executives and CEOs regarding U.S firms having to pay some of the world’s highest taxes and struggling to compete against foreign rivals. Industry representatives have aggressively lobbied against the proposal, which would increase the corporate tax rate to 28%, from the current 21%. The president also wants a minimum tax of 21% on overseas income, up from 10.5%.
This is because high tax rates reduce the operating budgets of firms, as ad valorem tax is imposed on the expenditure of goods/services. This means the firm's supply is reduced, and so they are forced to charge higher prices, as a result, demand falls. This is a prominent issue for the US government because of a concept known as the Laffer curve. This is because there is an optimum revenue governments can obtain for taxation where there is still high demand for goods/services, but not too little tax for no revenue to be obtained. This places U.S firms at a disadvantage as this reduction in operating budget causing a reduction in supply means that U.S firms will be selling goods at a higher price internationally.
Decreased international competitiveness can have adverse impacts on U.S trade which is particularly important as nations such as China will likely benefit from this. This has already been a prevalent issue as a result of the Tariff war that emerged under Trump over foreign trade.
However, U.S firms typically pay less tax than their international counterparts as the U.S tax code has several instances where firms are able to take tax breaks, such as by donating to charity. Reuters examined the effective tax rates – reflecting the actual tax payments companies reported – of 52 of the largest U.S.-based multinational firms, and then compared them to the rates paid by these companies’ main overseas competitors. The U.S. companies paid an average effective tax rate of 16% in 2020 compared to an average rate of 24% paid by 200 foreign companies that the U.S. firms named as their competitors in filings.
If Biden’s proposed tax rates were introduced, firms would be paying an average tax rate of 21%.
That’s still lower than the average rate paid by their overseas competitors. Moreover, U.S. firms would likely retain a bigger tax advantage over their foreign rivals than the analysis shows, for two reasons.
First, the Reuters calculations do not account for the impact of new tax breaks for U.S. firms that Biden proposes to encourage domestic manufacturing and clean-energy investments. Second, the Biden plan would also require foreign companies with U.S. operations to pay higher taxes on their U.S. income.
Hence, even with a rising corporation tax rate, due to the loopholes within the U.S tax code, Biden’s proposal still sways global tax rates towards the favour of the United States. This means that Biden is still taking a heavy nationalist approach to foreign trade, promoting domestic production of goods/services and in fact taxing foreign rivals more so than host companies. This shows how one of the world's biggest consumers is taking advantage of its hegemonic status and could be seen to abuse other states.
Overall it seems like the U.S’ tax proposal is one-sided and favours the U.S significantly, attempting to harm other countries by decreasing their international competitiveness and trying to introduce a tax floor. This tax floor can prove to promote the sales of domestic goods/services, and as a result put the U.S in bad light once more for such activities.
Written by Euan Taylor