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
IS THE U.S. TAX SYSTEM HURTING AMERICAN COMPETITIVENESS?3
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
IS THE U.S. TAX SYSTEM HURTING AMERICAN COMPETITIVENESS?4
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
IS THE U.S. TAX SYSTEM HURTING AMERICAN COMPETITIVENESS?5
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).
IS THE U.S. TAX SYSTEM HURTING AMERICAN COMPETITIVENESS?6
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
IS THE U.S. TAX SYSTEM HURTING AMERICAN COMPETITIVENESS?7
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
IS THE U.S. TAX SYSTEM HURTING AMERICAN COMPETITIVENESS?8
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,
IS THE U.S. TAX SYSTEM HURTING AMERICAN COMPETITIVENESS?9
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
IS THE U.S. TAX SYSTEM HURTING AMERICAN COMPETITIVENESS?10
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.
IS THE U.S. TAX SYSTEM HURTING AMERICAN COMPETITIVENESS?11
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).
IS THE U.S. TAX SYSTEM HURTING AMERICAN COMPETITIVENESS?12
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
IS THE U.S. TAX SYSTEM HURTING AMERICAN COMPETITIVENESS?13
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.
IS THE U.S. TAX SYSTEM HURTING AMERICAN COMPETITIVENESS?14
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
IS THE U.S. TAX SYSTEM HURTING AMERICAN COMPETITIVENESS?15
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
IS THE U.S. TAX SYSTEM HURTING AMERICAN COMPETITIVENESS?16
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
IS THE U.S. TAX SYSTEM HURTING AMERICAN COMPETITIVENESS?17
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
IS THE U.S. TAX SYSTEM HURTING AMERICAN COMPETITIVENESS?18
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
IS THE U.S. TAX SYSTEM HURTING AMERICAN COMPETITIVENESS?19
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.
IS THE U.S. TAX SYSTEM HURTING AMERICAN COMPETITIVENESS?20
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
IS THE U.S. TAX SYSTEM HURTING AMERICAN COMPETITIVENESS?21
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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