On April 26 President Trump unveiled key elements of his plan to reform the United States tax code to make American businesses more competitive. Perhaps the two most radical changes are to slash the corporate income tax rate from 35 percent to 15 percent and to extend that reduced rate to business income earned by passthrough entities — sole proprietorships, partnerships, and S corporations. Nathan Boidman suggests that, taking state and local taxes into account, the proposed 15 percent rate masks a much higher effective rate for businesses in some U.S. states and cities (p. 503).
Observers have asked many questions about Trump’s proposal. Foremost among them: How likely is Congress to enact any of the plan, and what tax benefits will it take away in order to pay for the lower rate? While the answers could drive business decisions for decades, it is far too soon to begin making predictions about what kind of tax reform, if any, will emerge from Congress this year.
One question that remains unanswered is whether the Trump proposal eliminates, or simply reduces, the likelihood that Congress will enact a destination-based cash flow tax along the lines proposed in the 2016 House Ways and Means blueprint. Because at least one person, Ways and Means Chair Kevin Brady, R-Texas, doesn’t think the proposal is dead, it may be wise to think about how the proposed tax will affect U.S. trading partners. Johannes Becker and Joachim Englisch examine how a U.S. destination-based cash flow tax could affect EU member states (p. 511).
If Congress is serious about reducing the corporate tax rate to 15 percent, it should consider whether lowering the rate will in fact make U.S. businesses more competitive. Many countries, after all, have already reduced their rates, or plan to do so shortly. Last fall Hungarian Prime Minister Viktor Orbán announced a 9 percent business tax rate beginning in 2017. More recently, the U.K. announced plans to lower its rate to 17 percent, while Australia is now considering cutting its rate to 27.5 percent (p. 465). Will American businesses be for sale to the lowest bidder?
Some international groups have railed for years against the evils of tax competition, referring to the pressure to reduce corporate tax rates as a race to the bottom. And as countries around the world have reduced their tax rates on businesses, economists are studying whether companies in countries with lower rates are really more competitive. Mindy Herzfeld reviews recent developments on the possible benefits and harm of tax competition and suggests that simply cutting the corporate tax rate might not make U.S. businesses more competitive in the global economy (p. 455).