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The Chart

US plays catch-up with tax reform plan

Could US corporate tax rate dip below G20 average?


US tax reform in context
Since 2000, the US corporate tax rate* has been flat while rates of trading partners have fallen. That will change dramatically in 2018 if US tax reform is adopted.

 


The plan

The US has embarked on a long-anticipated push to overhaul its business tax system, proposing among other things to lower the top corporate income tax rate to 21% from 35%**; to shift to a territorial tax system to align more closely with trading partners; and to reduce tax burdens on businesses organized as partnerships, S corporations and other entities whose owners and shareholders pay via the individual tax system.

If the legislation is passed by Congress and signed into law by President Trump, the US would jump ahead of jurisdictions around the world that have already undertaken similar reforms. The effect of this trend is illustrated by the dotted white line in the chart, which shows the average corporate tax rate for G20 countries since 1991, the year that heralded the current era of globalization. Between 1991 and 2016, that average rate fell 12.5 percentage points to 28%. The G7 followed a similar trajectory.

Follow the leader?

This chart shows how the passage of US tax reforms that lower the corporate tax rate to 21% will invert that proportion. The dotted lines above assume enactment of the 21% rate for US companies in 2018. That lower corporate tax rate of 21% (plus an additional 4%, on average, for state and local taxes) will push the US under the G20 average for the first time in 25 years.

 

** Republicans in the US House of Representatives and the Senate reached an agreement on tax reform on 13 December.

Among other things, the deal reportedly set the US corporate tax rate at 21% in 2018. Previous versions of the legislation had set it at 20%. The House and Senate are set to vote on the final bill the week of 18 December.

A new tax environment

It remains to be seen how governments will react. The overall trend of lower corporate tax rates has to be evaluated in the context of a growth in tax incentives in some jurisdictions and an increased likelihood of tax controversy. It will be more important than ever for multinational enterprises to monitor tax policy changes around the globe.

 

How we can help: Tax Policy and Controversy


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