Corporate income tax — USA | The latest happenings
For several years, the average corporate income tax rates have been decreasing across the world and this trend is not witnessing any setback till now. A consolidated version of Tax Cuts and Jobs Act was unveiled by a House of Representatives and Senate Conference Committee in December 2017. It was proposed to lower the individual and corporate income tax; following that code, the corporate taxes have been lowered to 21% in the year 2018.
Australia, Greece, United Kingdom, and several other developed countries have put forward their plans to cut the corporate income tax — as highlighted by a recent OECD report.
According to President Donald Trump, the recent tax deduction is the biggest tax cut in the history, which shook many of the agencies and websites who made an attempt to calculate total reduction in the individual and corporate income tax. After the claim, the Committee for a Responsible Budget put forward the results, invalidating the President’s claim, that the current tax cuts would be the eighth-highest in the US history.
In the same speech, he said that the reason that the businesses were leaving was the US taxes that were the highest or among the highest from a business standpoint. He added that that now the taxes are not the lowest but are definitely on the low side. This is evident through an analysis conducted by the Congressional Budget Office looking at the corporate income tax rates around the globe.
Other analysis reveals that the tax rate from 35% to 21% is the biggest corporate tax cut and also surpasses the tax cut passed under the former US President Ronald Reagan which brought it down from 46% to 34%
How will the US corporate income tax reduction affect the world?
As an alarming fact, the US tax cut from 35% to 21% will immensely affect the countries across the borders. This reduction will shrink the sum that other countries collected from the corporations. To cut it short, this 14% reduction in the US corporate tax would attract and extract the profits and investments from other countries. Companies will be more likely to put their chunks in the US which will, in fact, increase the revenue for the US government.
As the countries chase and follow one another, if we see from a bird’s eye view, this reduction will have an impact on the fiscal policies of other countries around the world. As the deputy division chief of the IMF’s tax policy said, “When one country cuts tax rates, usually other countries follow”
To pull the revenues back, other countries will likely reduce their tax rates as well, and the countries with close economic bonds with the US will likely witness bigger revenue losses.
At the top in the list are Japan, Mexico, and the UK that are likely to lose revenues by the US corporate income tax reduction. The less directly affected countries should be Pakistan, Estonia, and Poland.
Corporate taxes are the stimulators of the investments, corporate profits are relatively mobile and therefore, the governments of various countries use tax as a bait to attract those profits and tax them.
Impact on the US economy
As the economic decisions do not ripe in the short-run, similarly, the long-run impact of these implementations is anticipated in the form of US economic growth by almost 1.7%. adding to it, the wages and the capital stock would also increase by almost 1.5% and 4.8% respectively.
As the businesses take advantage of the lower corporate income tax rate, the GDP growth is forecasted to hop 0.44 above the current base. The Tax Cuts and Jobs Act would increase the GDP by almost 2.8% which depicts an increment of total GDP of around $5 trillion.