Corporate Tax in the United States

Corporate taxation has influenced the profits level that is obtained by entrepreneurs and managers worldwide for the multinational corporations and local businesses within all the countries. In addition, it has influenced in a negative way the actions of multinational companies throughout the heavy taxes that are recently taking place in the American economical sphere. Business activities internationalization during the last few decades of the 21st century has experienced an urgent re-evaluation of how government should receive the taxation from these multinational corporations on order to encourage investments into businesses. The business entrepreneurs from all over the world over the years have had some concerns about the heavy taxation law imposed by the government of most American states which largly underestimates the profit of intercontinental and local business organization. In the United States, for example, the subject has been one of the hottest debates that question the competitive nature of the country’s economy to attract multinational corporations.

Some of the concerns that have erupted over the years regarding the issue are that the American international tax system is more complex than any other country in the West. Also, more destructive, especially after the passing of the 1986 Tax Reform Act that has witnessed a lot of money going away, as most multinational corporations are opening businesses where the capital market is more attractive (Jennings, Weaver and Mayew 1021). The topic of multinational business taxing has been a major distress to the government of US as witnessed in the Congress debates since 1992. The Congress have pushed for reforms over the years to support the reduction of taxes on foreign and local investments in a bid to improve the level of investments in the US. The tax system employed in the US is one of the most complex tax regime of all, affecting the level of investment within and outside the country. Additionally, the tax plan has a direct cost implication on savings, government projects as well as the living standard of the low-wage earners in the US economy. Europe also has not been left out by the impending dangers of an economy that pushes away investors. For instance, the growing liberalization of Europe’s capital markets has stimulated discussion and debates by the European Commission regarding the coordination of corporate taxation. A policy development that most countries have supported not only advocates for a better tax system to the multinational corporations but also brings the questions of whether the present international company tax system is feasible. The 21st-century business environment is an atmosphere that emphasizes on the significance of capital-market incorporation as well as international commercial competition for the scarce resources. Consequently, it does not support the current tax system on multinational business organizations, which are profit-oriented (Clausing 905).

Business managers as well as entrepreneurs are finding it difficult to invest in the American economy because of the high tax rates that government imposes on the corporate businesses and on the dividends earned by the shareholders. Economists and shareholders still believe that the present 35 percent corporate tax rate to be one of the greatest challenge facing the American economy, the living standard of citizens as well as economic growth. Some countries have considered a reduction measure of their corporate tax to attract multinational investors in the last few decades leaving America with the greatest commercial tax rate amongst the industrialized countries (Jennings, Weaver, and Mayew 1022).

Japan is one of the countries of the world with high tax rate; however, its government is presently considering reducing the tax rate for corporations by approximately 5 percent, a step meant to improve investments. However, the US still holds the highest corporate tax rate when considered under various alternative processes. There is growing demand among investors, citizens as well as stakeholders of the economy over the need to lower the corporate tax rates to support investors to capitalize in the country. Therefore, this article will address the reason behind the rise in the United States tax on its multinational corporations as well as finding out whether this current tax method is suitable or should it be under restriction. Besides, it examines if reducing the 35 percent tax rate can bring back money to the economy of the US.

Current Tax System on Global Investment

The tax policy and plan significantly influences the level of investment among shareholders, entrepreneurs, as well as managers. The effects of taxes on the cost of capital and revenues to various business activities greatly inspire investment decisions. Tax systems have a great impact on the decision made by investors in a multinational corporation setting through the complex relations between the home and host country tax plan. Besides, the variances among countries regarding the treatment of amount overdue and equity funding to encourage or discourage investment opportunities.

The interest or motive of any entrepreneur or manager in the business world is to make profits and expand their business activities in line with their long-term objectives and goals. However, one of the greatest challenges experienced by entrepreneurs running a business within the local or international vicinity is the tax system adopted by the government. Tax is one of the greatest nightmares faced by managers and entrepreneurs of global companies. The massive levying rate primarily experienced in the America capital market has discouraged entrepreneurs from investing in the US economy. The United States of America has the highest tax rates system to the multinational corporation making its capital market unattractive to investors who have an interest in mobilizing capital in America.

The tax process is the responsibility of the federal government of the US. The imposition of tax on the multinational corporation occurs in two ways; which include taxing the shareholders separately and company too on the profit gained. The government taxes both the shareholders and the company as a distinct entity. The business pays one type of tax, and the shareholders pay another often imposed on the dividends or stocks sold in the stock exchange market. The “double tax” system has received criticism from financial analysists citing that it is destroying the economy and reducing profits gained by shareholders of a company as well as reducing the economy’s viability. Despite, the government’s effort to lure investors through incentives and repatriation the system has continued to keep away many entrepreneurs from investing in the US economy. Economists have proposed that using one tax system and wiping out the double regime can significantly improve the economy by creating more investment opportunities.

However, some analysts have urged the government to use the mark-to-market tax system on the shareholders which will improve a company’s profitability and make the country’s capital market attractive. The aim of a mark-to-market tax policy is to retain the corporate taxes but repeal the taxes levied on the investors. One of the greatest hurdles of this tax system is its capacity to discourage possible investors from participating in stock markets. The Comprehensive Business Income Tax (CBIT) played a significant role in a phase to reduce the corporate tax system by eliminating the dividend tax and tax on profits obtained in a given fiscal period.

Even though picking on taxing the company or its shareholders may appear to be taking cash from one pocket or the other; however, the key point is to reduce the corporate taxes. Conversely, economists have revealed that considering either to tax the shareholders or the corporation has prompted the need to develop a new fiscal plan for the improvements expected in the economy. Also, scholars believe that depending on one tax policy will mitigate some leaks and misrepresentations while aggravating other misconceptions from shareholders and economists. Though commentators have seen the need for the government to either tax the shareholders or corporation, some complexities come with either of the plans. For instance, if the Congress revokes the corporate tax and comprehensively depend on the shareholder tax, on the brighter side it will eradicate familiar distortions associated with the business tax system. These distortions that can be avoidable include the ability of the firm to acquire incentives by earning income abroad and changing of tax residence. The bad news regarding this system is the shareholder tax will remain higher (Schizer 1853). For instance, the shareholders will have a robust tax incentive to maintain a treasured stock.

Additionally, it will allow for tax exemptions such as foreign shareholders will no longer pay taxes through the corporation tax system. Consequently, various financial analysts have disapproved the system where the government will tax the shareholders only citing that it will be a challenge for the government to monitor this type of tax plan. However, to address the issue associated with shareholder tax the Congress can shift their attention to the other side of the coin, by revoking the tax levied on the shareholders and relying only on the higher corporate tax. Financial analysts have also censured the system despite its capacity to disregard distortions associated with the shareholder tax; however, it aggravates the distortions from corporate tax. An example of corporate tax distortion that will worsen is an incentive to shift earnings from the country where the corporation exists. Therefore, considering any of the tax systems requires a thorough and critical evaluation before selection to allow the government achieves its tax collection objectives.

In response, this paper gives a suggestion to the federal government of the US to use both corporate and investors’ tax system. With the demand for a consistently growing economy, the Congress need to consider and harmonize the rates combined in a way that will add up to the same rate if one was applicable. Consequently, a “double tax” system is not the best and appropriate plan of imposing taxes on corporation because it discourages investment in the US market. Nevertheless, the government can put extraordinary measures to attract investors into the US market by adopting new corporate taxes such as dropping the taxes as an incentive to the multinational corporations.

Incentives are some of the factors that the federal government of the US can use to attract the interest of oversea investors into the US. One disadvantage of the “double tax” system adopted by the US is the diversion of capital away from the country’s corporate sector and directing it to the non-corporate expenditures. Moreover, this diverts them to other nations with an attractive capital market for investments leaving the US economy under destruction (Dyreng and Kevin 1602). Changing the whole federal corporate tax can have drastic effects on the economy of the country besides making the US market unattractive, calling for the government to consider frantic measures to improve the condition. Therefore, the government through the relevant authorities should adjust the double tax system in a way that makes the total tax small to encourage foreign investment.

Every government in the world today levies taxes on business established within their territory. Corporate taxes can either deter foreign investment in a state or enhance it depending on the tax system adopted by the government of the mother or host country. Higher corporate taxes have the effect of reducing the profitability of multinational corporations which affect the level of direct or indirect investments. Countries such as India in the last few years have witnessed increasing number of oversea business investments thanks to the attractive corporate tax system.

India uses a corporate tax system based on four aspects of the market, including gross sales, income, and capital stock. The Indian corporate tax regime allows for the taxing of the corporation only and do not touch on the income earned by the stakeholders. The tax system has witnessed tremendous growth in investment opportunities because the government does not tax the dividends of shareholders making the capital market rewarding to investors. As a result, the capital market of India has remained attractive to investors running away from the US capital market and looking for investment prospects elsewhere. Furthermore, incentives offered by the government of India are some of the reasons for the ever-growing foreign investment in Indian stock market.

The United States of America has a tax system often referred to as “worldwide” strategy of tax that needs every American business to pay approximately 35 percent national corporate tax. The tax is levied on the income received by the corporation irrespective of where they earned them, either abroad or domestically. The business tax system has significantly affected investments in the US capital markets as investors divert all their resources away from the country’s corporate sector. One way through which this system of corporate tax affects the investment is because the US-based MCNs must pay taxes both to the host country and the US federal government a tax of 35 percent. The consequence is a reduction in the business profitability for most multinational corporations in the US, a problem that has made companies such as Starbucks victims of tax avoidance. The heavy tax on corporations have made many companies to evade taxes by either giving inaccurate financial report of the firm or bribing the tax collection officials to avoid paying their outstanding tax. Therefore, there is need to put some necessary actions that can make the US capital market attractive even to the local investors. Lowering the federal corporate taxes to approximately 15 percent will have a far-reaching impact on investment into the local capital markets as well as overseas.

Consequently, the current administration in the US should simplify the corporate tax system in a bid to lower the federal tax to about 15 percent or less to encourage active income earning through direct investments. By reducing the tax rate, the government will have to end to any form of tax on active income obtained by foreign business activities of the US-based multinational corporations. Besides, the federal government of America needs to reform its massive tax structure at home by reduction to create a business-friendly atmosphere and attract investors into the capital market.

The federal tax reform should be geared towards boosting both local and global business activities of the US-based corporations apart from bringing more investors to the US shores. In line with that, the reforms should focus on the critical issues affecting the whole capital market system and not just majority sound bites. Over the last few years, the value of America’s worldwide economy has fallen, which is one of the reasons why doing business in the US has become expensive when compared with other developed countries. Since capital is mobile, higher tax rates than other developed or third world nations divert the investment interests away from the American corporate sector and to a household, foreign nations as well as non-corporate sectors.

The US citizens are in need of this capital to be more industrious; however, the high taxes imposed by the government on corporations make the market unattractive. As a result, investors seek investment opportunities elsewhere which leads to a decline in real wages in America. For instance, if the price of a product is globally set, there is no room for a corporate tax to land except on the least itinerant factor of production, the American wage earner. Opportunities growth in some parts of the world accelerates the flow of capital outside the US; this is the reason it is important to reform the corporate tax in refining the well-being of American worker.

A lower federal corporate tax will provide adequate investment benefits to the American economy and households. Besides, it will allow the US to encourage local, foreign investment and provide a global competition for the capital markets. More money flow into the economy of the US translates to more investment opportunities by corporations. As a result, the local wage earners would have more advanced facilities such as computers, additional studies, and more capital at their disposal which turns into new jobs, higher living standards among other benefits.

There are ways that the government can employ to repatriate the massive profits gained by the US-based multinational corporations back to the country. The strategy will be providing them temporarily with very low tax rate on the profits earned such as tax holidays. The repatriation tax holiday is recognized globally to increase the corporate investment and create job opportunities to the American residents (Albring et al., 02). Besides, it generates a tax windfall to support infrastructural development in a country. A repatriation holiday is a tax waiver that loses income and as a result cannot be payable. The system is meant to encourage multinationals to return overseas profits to the US economy.

Additionally, it gives the multinationals an enormous tax break while increasing the debits over the long-term period. Despite the support of repatriation tax holiday by most governments, the reality is that the scheme would realize none of the objectives; instead, it could worsen a country’s financial and economic challenges over a long period. Repatriation tax holiday will lose significant federal income resulting in swelling of budget discrepancies. Consequently, it will not be able to pay for the infrastructural development in the country. Furthermore, the scheme was applied by the federal government in 2004 and did not give the anticipated economic paybacks (Morrow and Robert 64).

Conclusion

Corporate tax is one of the ways that most governments of countries of the world obtain taxes from companies, multinational corporations, and local business organizations. However, the level of corporate tax imposed on a corporation can adversely affect the degree of investment in or outside the country. The fiscal policy and plan significantly influence the level of investment among shareholders, entrepreneurs, and managers. The influence of taxes on the cost of capital and revenues to various business activities greatly inspires investment decisions.

Tax systems have a great impact on the decision made by financiers in a multinational corporation atmosphere through its complex associations between the home and host country’s tax plan. Countries are working to decrease the corporate tax to attract investment in the countries of origin. The US has remained to be one of the countries with the highest corporate tax among the developed nations such as Japan. However, there is growing demand among investors, citizens as well as stakeholders of the economy over the need to lower the corporate tax rates to enable financiers to invest in the country.

The taxing of the multinational corporation occurs in two ways; through taxing the shareholders and companies on the corporate profit. The business pays one type of tax and the shareholders also pay another after receiving dividends or selling the stocks in the stock exchange market. The “double tax” scheme has received criticism from scholars citing it to be destructive to the economy thus reducing profits gained by shareholders of a company.

With the demand for a steadily growing economy, the Congress need to deliberate and harmonize the rates combined which will add to the same rate if one was applicable. Therefore, a double tax system is killing the economy by discouraging investment in the US capital market. The consequence is a reduced profitability for most multinational corporations a problem that has made companies such as Starbucks victims of tax evasion.

Therefore, there is need to put actions that can make the US capital market good-looking even to the local investors. Depressing the federal corporate tax to approximately 15 percent will have a drastic improvement in investing into the local markets as well as overseas. Subsequently, the current administration of the US should work to simplify the corporate tax structure in a bid to lower the federal tax to about 15 percent or less to boost active income earning through direct investments. By reducing the tax rate, the government puts an end to any form of tax on the active income achieved by foreign business accomplishments of the US-based multinational corporations. Unless the government undertakes a drastic measure to reduce the taxes on corporate businesses, it will continue chasing away possible local and foreign investors who are looking for investment grounds for their capital and resources. Maintaining the status quo by the government concerning the huge revenues collected from the multinational corporation will continue making the American economy destructive to investors. Additionally, it will affect the level of living standards of the locals as investors are kept away and most of the capitals are directed to the non-corporate sector and household. The impact of low investment is high cost of living accompanied by high poverty level as the cost lands on the American worker.

Recommendations

To attract investors both from foreign countries and domestic the government should offer incentives. Incentives are some of the elements that the government can employ to make the US capital market lucrative for those investors seeking for investments grounds. For instance, the Indian government has attracted foreign investment through this plan.

Allowing repatriation tax holiday to multinational corporations will attract investment. By using the system, the government actively encourages multinationals to return abroad profits to the US market. Also, it gives the multinationals a huge tax break while increasing the debits over a period. However, the government should evaluate the economic impact of repatriation tax holiday concerning its outcomes.

Another policy that the government can use to attract investors from foreign countries, as well as domestic investors, is through corporate tax reduction. Lowering the federal corporate tax will provide adequate venture benefits to the American economy and households. Moreover, it will allow the US government to encourage local and foreign investment as well as providing a global competition for capital markets.

Abolish the double tax system in the US capital market. Double tax in America has negatively affected the investment feasibility of the US capital market. The federal government should, therefore, adopt a simple corporate tax system that will focus on taxing a corporation and not the dividends earned to let entrepreneurs participate in the capital market venture.

Finally, I recommend the government to undertake further research on the subject of corporate tax. The future research should focus on other possible options of making the US capital market profitable. Additionally, the study should focus on other corporate tax system that are suitable for the US economy.

Works Cited

Schizer, David M. "Between Scylla and Charybdis: Taxing Corporations or Shareholders (Or Both)." Columbia Law Review, vol. 116, no. 7, Nov. 2016, pp. 1849-1913.

Jennings, Ross, Weaver, Connie D., and Mayew, William J. "The Extent of Implicit Taxes at the Corporate Level and the Effect of TRA86." Contemporary Accounting Research, vol. 29, no. 4, 2012, p. 1021.

Dyreng, Scott D., and Kevin S. Markle. "The Effect of Financial Constraints on Income Shifting by U.S. Multinationals." Accounting Review, vol. 91, no. 6, 2016, p. 1601.

Clausing, Kimberly A. "The Effect of Profit Shifting on the Corporate Tax Base in the United States and beyond." National Tax Journal, vol. 69, no. 4, 2016, pp. 905-934.

Morrow, Michaele and Robert C. Ricketts. "Financial Reporting Versus Tax Incentives and Repatriation under the 2004 Tax Holiday." Journal of the American Taxation Association, vol. 36, no. 1, 2014, pp. 63-87.

Albring, Susan M., Mills, Lilian F., and Newberry, Kanye J. "Do Debt Constraints Influence Firms' Sensitivity to a Temporary Tax Holiday on Repatriations?" Journal of the American Taxation Association, vol. 33, no. 2, 2011, pp. 1-27.