Question

Are corporate taxes in the United States too high? Search the Internet for an economist’s or other expert’s opinion on the subject. Why would multinational corporations compare tax rates among countries before setting up business operations in a specific country?

Answer 1

a. As per studies, the United States has the highest corporate tax rate of the 34 developed, free-market nations which constitute the Organization for Economic Cooperation and Development (OECD). The highest corporate tax rate in the U.S., which is bascially a combination of federal and state and local taxes, is about 39 percent in the current year, which is well above the other nations part of OECD. Following could be the reasons:

1. The U.S. government charges taxes on the income which U.S. corporations not only within United States but abroad as well. Since these firms also pay taxes on profits earned abroad to those countries’ governments, U.S. corporations end up paying a double tax on foreign-earned income. Most developed countries don’t levy such a kind of double tax system; they use a territorial tax system.Due to this, only is this double tax poses as a burden on US corporations in and of itself, but apart from that, it also creates a disadvantage for them as compared with foreign competitors who are not subject to the double tax.

2.Since the high tax rates and corporate tax deductions and credits have such an enormous impact on corporations’s revenue and bottom lines , luring the government or the politicians to make the tax rate system benefical for the US corporations , leads to a valuable use of corporate income. If corporate taxes burden was not so high, companies could instead have spent on developing new products and services and increasing sales. Such high tax rate burden not only causes issues for the corporations but for their customers as well, because these products and services either take longer time to get to market or are never able to reach the market. As per the economists, lowering the tax rate would actually increase tax revenue because corporations could spend and devote more more resources to taxable, profit-generating activities.

b. When a multinational company decides to invests in a host country, they plan to make investment of a significant size. Hence governments of the host countries will often offer incentives to these firms such as grants, subsidies and tax breaks to attract investment into their countries.

Due to this,a Multinational corporation is able to take benefits of tax variations by setting up its business officially in a nation where the tax rates are lower than the others.