The Silent Winner in Corporate Tax Reform
The latest version of the House of Representatives Tax Reform plan has been released, and it seems to benefit US workers and the economy as a whole.
It also points to a more flattened income tax for individuals. We still need more time to see the legislation, and, of course, it must go through the arduous process of becoming a law.
As of now, this is beginning to look more promising.
I want to highlight a hidden benefit of a lower corporate income tax rate that few folks are noticing.
A lower corporate income tax may incentivize a substantial amount foreign operations setting up shop here and may bring a substantial amount of jobs and capital into the United States.
This topic is near and dear to my heart. I live in Greenville, South Carolina. If you could roll back the clock 30 years, you would see a textile empire here.
The textile industry has since been crippled by NAFTA and other competing factors. (However, I am glad to report my friend Devin Steele reports the US textile market is coming back. See his article here.)
These are direct foreign owned companies that bet big on my state and the US, and it has paid off well for both sides of the table. We are honored to have them in our community and thankful for their continued investment. In fact, the Post and Courier reports BMW’s South Carolina plant leads the US in car exports. The South Carolina ports are humming with these amazing machines going to all points of the world.
Here are two substantial factors that may attract foreign businesses like these to consider future investments and expansion the United States:
The decision to move operations is now more tax neutral and may even be tax beneficial.
The current US corporate income tax rate is 35%. That is before add on taxes such as the corporate Alternative Minimum Tax and other blood thirsty code sections. Most developed nations are far below this rate. The United Kingdom, France, Germany, Ireland, and China for example are approximately 19%, 33.33%, 30%, 12.5%, and 25% respectively. To add insult to injury, only profits earned in these countries are taxed in country. The US uses a world-wide tax system and taxes all profits at the US rate regardless of the country of origin. There are strategies to mitigate this, but the starting point is expensive.
You can easily see decision makers otherwise wisely frightened off by our enormous 35% US corporate tax rate will now think twice about passing by the US as a new investment market with a proposed rate of 20%.
In fact, some companies may substantially benefit in income tax savings by allocating in jobs and production away from a high rate (say 33.33%) into our new low rate of 20%. Large multi-national companies have been enjoying income tax benefits by sending jobs and production to low tax jurisdictions for years. This low rate may induce foreign companies to use the same strategy.
Tax neutral options favor our other benefits in the United States.
Just as there are other non-income tax factors driving decisions to relocate US based production and jobs to non-US locations, there are several features of the US economy attractive to foreign investors. These other factors are now potentially more accessible with the income tax burden substantially lower. Factors like a robust capital market with regulation and “checks and balances” to help ensure transparency, fairness, and the rule of law. We have skilled labor and a strong university system in our country, so foreign countries may have easier access to new labor pools. These factors also drive our thriving signature research and development mindset consistent with our capitalistic ideals. The list goes on and on. In summary, all of the good aspects of our capital market just went on sale.
As with any prediction on income tax reform, be it corporate or personal, only time will tell. Specifically with this prediction, the import/export taxes may inhibit some of this cross border activity despite the lower income tax rate so there are no guarantees.
It also remains to be seen how this reform will impact our deficit and the impact to foreign nations that do intend on investing more in the US. It is too early to diagnose the impact on the world-wide economy.
I remain hopeful this reform will continue to gain momentum and help create value in our economy and the world on a whole, and of course more jobs.
I am predicting a meaningful number of those jobs in the US will be foreign based companies accessing all we have to offer.
Originally published on LinkedIn.