US Tax System

Running head: IS THE U.S. TAX SYSTEM HURTING AMERICAN COMPETITIVENESS?1

Is the U.S. Tax system Hurting American Competitiveness?

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IS THE U.S. TAX SYSTEM HURTING AMERICAN COMPETITIVENESS?2

Table of Contents1.0 Introduction.....................................................32.0 How the US tax system is hurting American competitiveness........3

2.1 Tax system complexity and the corporate rate of tax.............32.2 How the high corporate tax hurts the economy....................5

2.3 International tax systems and competitiveness...................62.4 Tax code hurting competitiveness................................8

2.5 How the current tax system hurts American workers..............102.6 The current tax system hurts the corporations..................11

3.0 Conclusion......................................................124.0 References......................................................13


1.0 Introduction

The United States of America, being a federal government

with autonomous states and local governments, imposes taxes on

each of these levels. These taxes are on income, payroll

property, sales capital gains imports, dividends, estates and

gifts and also various fees. It has one of the most progressive

taxes in the world. Competitiveness on the other hand can either

be domestic and also international where domestic competitiveness

is among the firms located in the United States of America,

whereas international competitiveness is the ability of a

domestic firm to compete with a foreign company. The United

States of America does hurt its competitiveness in one way or

another. This affects the investments in the county, especially

the foreigners. This will be discussed in details in this paper

(Marx, 2015).

2.0 How the US tax system is hurting American competitiveness

2.1 Tax system complexity and the corporate rate of tax

American citizens, be they economists, politicians or

others, agree that the United States tax system or tax code is


very extremely complex. This complexity remains an abstraction to

the entire citizen and there is least they can do because the

complexity affects all the sectors of the economy say businesses,

workers, and/or taxpayers.

American businesses cannot avoid the complexity in their

day-to-day activities and this is as a result of inherent

problems as well as frequent changes in the tax system. What is

more, despite the frequent tax code changes over the years, two

basic facts still remain which are the fact that America still

remains to have the highest corporate income tax rate in the

developed world. In addition, the United States has an outdated

tax system, which places the American companies at a disadvantage

while trying to meet the demand of a competitive global market

place (Athur, 2014)

Irrespective of its level of complexity, the American tax

system is expected to promote economic growth and encourage both

domestic and international competitiveness. However, the system

has failed in both of the above. The current complex tax system

is hurting the Americans in different ways in that a joint

committee on taxation analysis found out that, a reform and


simplification of the tax would be beneficial in the following

more than one way. Some of the ways in which simplifying the tax

would help the Americans (stop hurting them) are as follows:

a) Boost the wages after tax by approximately two point five percent two years after

enactment and approximately six point five in the long run.

b) Increase Americas GDP by at least one percent after two years of the enactment,

approximately three point five after ten years and six point one in the long run.

c) Increase the Americans domestic investments by approximately two percent after

two years of the enactment, six point five after ten years and six point eight in

the long run.

The corporate rate of tax in America is currently 35%, which

obviously makes it one of the highest in the developed countries.

If it were reduced to 25%, it would (by great extent) promote

competitiveness of the American companies. Instead, it is

discouraging them and pushing them away. It is because of this

that America has become less unattractive location for the

corporate headquarters of most companies. According to a report

published by one of the journals in America, it hosted 218 among

500 of the largest corporations in the world back in 1986. Today,

this number has reduced to 137 out of the 500 (Philip, 2015).


The code has adversely affected the level of employment in

America as a reform would help in job creation and create a

playing field for as many investors as possible. Therefore, tax

code complexity and the corporate income rate of taxation plays a

major role in affecting the competitiveness of the firms in

America both domestically but most importantly internationally.

If the tax code complexity is simplified to an understandable

level, and the corporate income rate of tax reduced and/or

replaced with territorial tax, it would be a major boost to the

competitiveness in the United States companies. Investors will be

able to understand a simplified tax system and the territorial

tax only will attract even more and more investors. Healthy

competition is vital to the customer and to the country at large

as the customer benefit from quality services that are affordable

and the government will enjoy an increased amount of the amount

of tax collected due to an increased tax base.

2.2 How the high corporate tax hurts the economy

The corporate tax system of the United States of America is

the highest among the developed countries. It is currently at

39.1% comprising of 35% from the federal government and the rest


of the state rates. When this is combined with the worldwide tax

system adopted by the United States where companies are taxed

again upon return to the United States, it makes the American’s

tax to be the most threatening to the economy.

The high tax makes the United States of America to be less

competitive among other nations in terms of investments and makes

the investments to be less profitable. Thus, companies will avoid

a place where their return is at a threat of high cut off and

hence the high tax poses a threat and hinders potential investors

from investing. Less investments causes low job creation and

slower wage growth.

The high rate also makes the companies already located in

the United States to invert-this occurs when a United States

business merges with a foreign company and the formed company

relocates its headquarters to another country. This was evident

with many United States countries in late last year. It is also

possible that the businesses sell themselves to the foreigners.

Either of the above enables a company to avoid the United

States worldwide tax and the high corporate tax. This is because,

the income they earn in the foreign company will not be taxed


again in America, and the exaggerated corporate tax will be

avoided. This affects the country’s bottom line in the short run

as well as in the long run and it is obvious that it will remain

to be an alternative option for rational investors as long as the

rate of corporate income tax remains high as it is currently

(Mrtin, 2012).

If the corporate income tax rate is lowered and the

territorial system replaces the world wide tax system,

(territorial only taxes the income earned domestically), then,

the Americans industrial sector would boom. As it is now, though,

the high corporate tax rate and the worldwide system still bar

potential employment opportunities and the growth of the wage.

2.3 International tax systems and competitiveness

For over half a century, America has not reviewed its

international tax system or laws, these laws were last revised in

1963 when America enjoyed or accounted for fifty percent of the

world economy and did not face a lot of competition from other

nations.

Today, advances in technology and innovation have made the

world economies to be more interconnected and as a result,


international competitiveness has arisen. When these reforms were

last made, that is, back in 1960, American companies whose

headquarters were in the United States comprised of 85% of the

world largest companies. If compared to today American companies

whose headquarters are in America, only 30%of these companies

whose headquarters are located in America are ranked in the top

20.

American companies are in competition for customers in all

corners of the world and against foreign nations who are willing

to attract more customers and create a wide employment base

(Rosanne, 2001).

However, it is quite unfortunate because the international

tax laws fail to reflect the ever-changing global marketplace in

which the American companies now compete. Compared to their

competitors, it turns out that the United States has one of the

most unwelcoming international tax systems in the world. This is

hurting American companies and workers in an already difficult

market place or environment.

The problem is that the American companies are taxed three

times: on the United States, on their foreign earnings, and also


when the foreign earnings are brought back to the United States.

Therefore, the American countries are working at a disadvantage

when compared to their foreign competitors who have already done

way either this system of global taxation, due to reforms to

promote domestic growth of the economy. It is unfortunate for the

American citizens who are the only ones, among the G8 citizens

who have not benefited in any way with the reformation of

international laws of taxation. The lack of modernization of the

economy makes the investments less friendly and hence hurting the

Americans

The international taxation’s status quo makes the American

citizens and workers lose:

a) Prevent about $1.7 trillion from coming back to the United States

b) Prevents the United States companies from selling some of their goods to the

foreign countries and also in the domestic market.

c) Creates an unfriendly environment for the United States in its attempt to

compete in the global marketplace against foreign nations that have reformed

their tax systems.


d) Fails to persuade the foreign nations to locate their headquarters in the United

States and instead creates incentives for the once situated in the country to

relocate them overseas.

e) Makes the number of foreign takeovers to increase with time.

Therefore, the international tax system should be set in

such a way that it promotes healthy competition especially at an

international level. Otherwise, competition at a global level is

a problem if international tax laws are set in a way that they

discourage foreign investments. If the United States of America

would address this problem, the benefits that would be realized

would be far and wide.

2.4 Tax code hurting competitiveness

It is clear that the level of global competition is much

higher than it was ten or fifteen years ago. In addition, this

competition is expected to be even higher in the future than it

is today. Some of the respected authorities when they addressed

the issue of globalization said that this competition will

eventually become one of the greatest historical transformational

change and it will be in rivalry with the industrial revolution

by then (Marey, 2012).


The American attitude is therefore supposed to change

rapidly and dramatically. American leader’s areas supposed to

come up with policies and practices that will place all the

companies in the United States with a level of the 21st century.

Which is otherwise called by some scholars, the globalization

century? If this happens, reformed countries will be dramatically

different from the 20th century in more than one way, mostly, the

level of competition for jobs at a global level, opportunities in

education, investment, and market capital.

Among the 193 countries recognized by the United Nations one

may strongly argue that the United States has the worst tax

system in the world when argued from the angle of global

competitiveness. It is even worse when compared with some

countries like Malawi, Nigeria, Thailand, Ecuador, Afghanistan,

Ghana, Bangladesh, Iceland, Libya, Belize and other third world

countries that are currently developing without taking into

consideration the world’s major economic powers such as Germany,

China, Japan, Brazil, and the United Kingdom.

This is summarized based on the fact that there is no any

other country that has the following tax systems or whose systems


are comparable with the Americans. These uncompetitive features

in its tax system are as follows:

a. Highest corporate income tax in the world; hence, the United States

have ignored the trend adopted world wide in the past

decades of fairly reducing the corporate income tax. In

addition, the United State has refused to follow the example

of Japan that lowered its corporate income tax.

b. The United States corporate tax income is levied on the world wide income

contrary to other nation’s base, which is on domestically earned income.

c. It has the most complex tax system in the world and as and costly in complying

with and as a result:

i. The compliance cost is estimated to be $431 billion per

annum

ii. The economists term these compliance costs as “dead

weight “as they add nothing to the value of the economy.

iii. These compliance costs have been increasing with time.

iv. The compliance costs, represents a hidden tax and

unfortunately fall on the low income earners, that is,

they are highly regressive.


v. The compliance tax also reduces the rate of economic

growth, which affects everybody.

d. Lack of mechanisms to adjust borders or border adjustment mechanisms;

i. This means that the United States of America has no

power to reduce its export tax and the ability (after

the enactment of NAFTA and GATT) to levy taxes to the

incoming goods or imports.

ii. The United States happens to be the only one among the

OECD2 that does not have such a feature.

iii. As a result, it has the trade deficit that is by far

large.

As a result, the American citizens are hurt by the

persistent tax systems that affect them in a negative way as far

as economic growth is concerned and level of investments. One

would argue that, when we speak of a tax structure that is not

competitive, we are not referring to the taxation level, but to

the manner in which the collection of the tax burden tax burden

takes place. Although it may not be clear to the general public,

the structure of a country’s tax system has great impact on the

country’s economic health, growth rate and the unemployment


level. There has been a magnification the negative effect of our

tax code by globalization (Wentworth, 2015).

In order to address all four of the enumerated uncompetitive

features to the fullest, there is a need to reform the tax and

perform fair tax. If the American tax authority adopts this fair

tax advantage, it would transform it from being the worst

performing of in the global competitiveness to become a model

that other countries would want to certainly copy. The fair tax

would not only increase the level of employment opportunities but

also would be less costly to the government that does not have to

increase its spending to solve the existing economic problems.

Global competitive remains one of the reasons why there is need

for fair tax and probably one of the most important reasons.

2.5 How the current tax system hurts American workers

It is unfortunate that despite the corporate tax rate of the

United States being relatively high; it raises little revenue as

the United States code is characterized by a lot of deductions in

forms of credits, exclusions, and loopholes. The high rate of

corporate tax worldwide system of taxation makes investment in

the United States difficult, not forgetting the complexity of the


tax system. Reduced or lack of investment of all is

disadvantageous to both the economy and the workers.

Today, fifty percent of the business income is affiliated to

the “pass through” entities (an example of which is the US

corporations) and partnerships. Investors opt these types of

businesses because they are unlike corporate entities; these are

exempted from the corporate income tax. The complexity and

incentives for tax avoidance involved in corporate tax rate makes

it costly due to high administration and compliance costs.

In a research conducted by one of the growing body in the

United States, it revealed that due to mobile capital world, it

is the workers who beer the rising share of the burden of the

corporate income tax. This is evident due to low employment

opportunities and/or lower wages.

What is more, because workers form a great role in healthy

completion, their welfare if well taken care of will be a vital

element in making the a competitive United States of America.

Therefore, United States should work towards ensuring that nobody

loses his/her employment because of complicated tax laws, but

instead, they should create more job opportunities. More


opportunities will be created in there is foreign investments and

policies to improve the working conditions of these workers. It

is also vital that the workers are encouraged to be more

competitive and innovative in order to provide quality services

that will attract customers from all parts of the world. This can

be possible via research.

2.6 The current tax system hurts the corporations

The high rate of corporate income has got an adverse effect

on companies located in America. This is because, as one of the

company’s goals is profit maximization, high taxation rate

affects or hinders the realization of this goal. Thus, the

companies make rational decision that will help boost their

profit base and avoid the reduced profit making. The companies

may:

a) Adopt merger and takeover bids; the companies are allowing foreign

based companies to take over them and thus they are

relocated their headquarters in the foreign nation. As a

result of the relocation, some of the employees, who finds

it difficult to move with them are left behind and lose

their job in the process. Relocation also means that there


will not ne meetings held in the previous headquarters and

this affects the transport sector and other related sectors

as well. This is also called an inversion.

b) Hostile takeover: This happens when the majority shareholders

decide to take over the whole company by opting to buy out

the whole company and making the company private in the

process. The foreign investors may opt to use the hostile

takeover phenomenon and obtain a company located in the

United States of America, especially on the ground that in,

there is no global competitiveness and that the tax rate (on

corporate income) is low.

c) Profitability index: the high tax rate on corporations and

worldwide tax reduces the amount expected to be realized

from the organization. The investors in that company, that

is, the shareholders will therefore earn lower incomes in

the form of dividends from the reduced profits (Kmir, 2001).

3.0 Conclusion

From the above discussion, it turns out that the most important

aspects hurting American competition are the high rate of

taxation of the corporate income and United States international


tax laws. It is as a result of this that the employees or

workers, companies/ businesses, and other sectors are affected.

Therefore, the United States is advised to act accordingly to

address the problems it is currently facing.


4.0 References

Athur, K. & Campbel, G. (2014). Lets Invest For Tomorow. It’s Time

to Reform our Tax Systems, 1-3.

Kmir, M. & Benly, K. (2001). The US Tax System. Chicago: Innovative

Word Press.

Marey, M. & Kibs H. (2012). Te US tax System . Rhe National

Bussiness Issues , 231-243.

Marx, G. & Ludewl, Z.(2015). Reform the Outdated Tax System to

Enhance. Council on Jobs and Competitiveness , 20-22.

Mrtin, B. & Phoebe,J. (2012). International Taxation: How does

the tax system impact U.S. competitiveness? In K. Martin, The

Tax Pollicy Briefing Boook (pp. 3-4). New York: The New York

Business Publishers.

Philip, L. (2015). US Tax Code Hurts the Competitiveness, Costs

Jobs. TheAmerican Business Journal , 20-25.

Rosanne, A. & Mires, N.(2001). "Where Will They Go if We Go

Territorial? Dividend Exemption and the Location Decisions of


U.S. Multinational Corporations. National Tax Journal 54 , 787-

809.

Wentworth, M. & Garry, Q. (2015). Simplified Tax COde and Its

Implications. The Ntional Tax Issues (pp. 20-25). New York:

Innovative Word Press.

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