US: Deep cut corporate tax rate should spark more global tax competition - NAB

US corporate tax rates are high by international standards and tax competition around the world is driving corporate tax rates down, according to analysts at NAB. Against this background, the high US rate is portrayed as the country shooting its businesses in the foot, they further add.

Key Quotes

“While a 15% tax rate is popular with business, it is not that simple to implement. Big tax cuts involve big revenue losses (the Tax Policy Center calculates these at $US2.2 trillion over 2018 to 2027) unless optimistic assumptions are made about how tax cuts grow the economy and generate revenue. The US Treasury, already facing a poor deficit and debt outlook, probably prefers a more self-funded package of measures. This would combine lowering the headline statutory tax rate with broadening the tax base by cutting back on business tax allowances.”

“US Treasury has said that 28% looks “close to the rate that seems plausible in a revenue neutral, base broadening, rate reducing business income tax reform plan” and that was also the rate in Obama’s 2012 tax plan. However 28% looks high by the standards of the President’s 15% and the 20% outlined in last year’s Republican Party proposal and recent media speculation refers to a “low 20s” rate being discussed.”

“Cuts to corporate statutory tax rates grab headlines, but what really matters is the impact of the full package of measures the US adopts. US depreciation allowances and the ability to deduct interest paid are worth a lot to US corporations and the pressure is to make the former more generous rather than less. Taking allowances into account pulls the average rate of tax paid by US corporations down into the 20s. For instance, 258 corporations actually paid a rate of 21.2% between 2008 and 2015 and the CBO estimates a 29% average US rate, well below the 35% statutory rate but also well above many comparable OECD countries.”

“We think the US will propose big tax cuts not fully offset by base broadening, widening the deficit and worrying fiscal hawks. Rates around 23% look more likely than 15% with fiscal hawks trying to water down the President’s plan.”