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A U.S. Corporate Tax Hike’s Potential Cost on Global Competitiveness

University of Maryland, Robert H. Smith School of Business

Among the centerpieces of the Biden administration’s proposed $2 trillion infrastructure bill is an increase in the top corporate tax rate, meant to help cover the costs of the expansive spending plan. However, finance professor Michael Faulkender at the University of Maryland’s Robert H. Smith School of Business says the impact of the tax increase will be felt in the competition to attract companies to locate and maintain operations in the United States.

The Trump administration’s Tax Cuts and Jobs Act (TCJA), which passed in 2017, was intended to bolster the country’s position in that area by cracking down on the ability of firms to hold money overseas, he says.

“Prior to TCJA, if you operated domestically, you would pay 35% in federal corporate income tax. Whereas if you were able to structure your international operations in a certain way, you could essentially pay zero at the time and it would be deferred until the money was brought back to the United States,” says Faulkender. “What happened as a result of TCJA is that instead, if you operate here in the U.S., it's 21%; if you operate overseas, the tax rate is roughly 13%, so there wasn't as much disparity in taxes depending upon where you operate.”

 Prior to the TCJA, the United States had the highest top corporate tax rate of any country in the Organisation for Economic Co-operation and Development (OECD), a group of the world’s most advanced economies.

The new tax law, which went into effect in 2017, sought to create incentives for investment on the front end, Faulkender says. It reduced corporate tax receipts in order to spur investment, with those funds being made up later on through stronger economic activity. It was a strategy that was beginning to come into its own, Faulkender says, but then the COVID-19 pandemic drastically altered business operations globally.

“It was understood that because of the immediate expensing that there was going to be a reduction in corporate tax receipts within the first one or two years, but that we would see a rebound in corporate tax payments,” says Faulkender. “We began seeing that rebound prior to the onset of the pandemic with an increase of roughly 20% in corporate tax receipts during the first four months of the 2020 fiscal year.”

The TCJA also aimed to discourage U.S. companies from offshoring or moving their headquarters to countries with lower corporate tax rates, even when most operations take place domestically, Faulkender says, by reducing the potential tax burden facing those firms.

“By raising corporate income tax rates, we risk curtailing private sector economic activity in the years to come.”

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