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New World, New Policy: How Tax Cuts help U.S companies to go abroad New World, New Policy: How Tax Cuts help U.S companies to go abroad
by Prof. Michael R. Czinkota
2017-05-26 11:04:10
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World trade has forged a network of global linkages, in which everyone and every country is involved. Nowadays, a drought in Brazil and its effect on coffee production and prices is felt around the world. U.S subsidies for ethanol production from corn affects prices for other agricultural crops and live-stock in the far reaches of the world. As the key player in globalization, any U.S reform tends to change the international market. The old saying goes, if the U.S. sneezes, other nations catch cold.

tax01_400After only 100-days in office, President Trump has already released a tax reform memo to the public. Although not complete and detailed, there is clear a signal coming from the release how the government would like to encourage U.S companies to export and invest abroad.

First, comes a cut in the top tax rate for all businesses to 15%, far below the current 35% top rate. This reduction is not imbalanced since it would also benefit the owners and shareholders of international corporations in the United States. With this tax cut, companies, especially manufacturers, can lower the price of exports, and have more money for R&D and marketing. This measure will greatly enhance the competitiveness of U.S goods in the global market. Also, a tax reduction will significantly reduce the financial constraint on companies and allow American companies to seek investment opportunities on a global scale.

Second, there is a proposal to switch to a territorial tax system. Today, U.S. companies must pay U.S tax on all their profits, regardless of where in the world those profits were earned. A territorial approach would require firms to only pay U.S. tax on what has been earned in the United States. For profits held overseas, the Trump administration wants to offer a one-time tax reduction opportunity which encourages the return of capital from abroad.International profits by U.S. multinational corporations held abroad are estimated to be $2.6 trillion, without incentive, they may never be brought back to the United States. A U.S oriented flow will provide new capital for domestic investments to infrastructure and innovation.

This plan may seem to be an unusual proposal for a president who has championed an “America first” approach and railed against companies that move jobs and resources overseas. But when looking at it closely, we find that the territorial tax system gives U.S companies incentives to go abroad and to obtain a growing share of the global market. For the profits held overseas, there will be a special, one-time opportunity to bring home money parked abroad. The one-time tax reduction gives companies a chance to relocate their money, rearrange the resource distribution and adjust strategies according to the market dynamics.

President Trump is consistent with his polices from campaign to the office. This tax proposal shows a continued gain for strength of the domestic market, but also encourages the exploration of every corner in the world, to help America to be great again.

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Professor Michael Czinkota teaches international marketing at Georgetown University’s McDonough School of Business in Washington D.C. and the University of Kent at Canterbury, U.K. His key book (with Ilkka Ronkainen) is International Marketing, 10th ed., CENGAGE


     
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Emanuel Paparella2017-05-26 14:33:39
Slashing taxes inevitably leads to economic growth? Really? And for whom? Let’s see how true this misguided idea is.

“After a decade when GDP growth averaged only 2%, Treasury Secretary Steven Mnuchin has suggested that the proposed tax cuts will raise the economy’s sustainable growth rate to 3%. This is ailed as progress. But the question persists: is there an obvious correlation between lower tax rates and faster economic growth?

Labor force growth actually slowed in the aftermath of both the Reagan and Bush tax cuts. Productivity growth also slowed following the Reagan tax cuts, although it did briefly accelerate following the Bush tax cuts.This can be easily fact checked.

Labor force growth actually slowed following the most recent U.S. tax cuts. So, there is little obvious correlation between lower taxes and faster GDP growth, despite the suggestion that the reduction in tax rates in the early 1980s was followed by faster economic growth in the second half of the 1980s.

Economic growth actually accelerated further in the 1990s, against a backdrop of rising tax rates. Taxes were rising as GDP grew in the late-90s. Also, it is well known that US corporate profits tend to fall when tax rates rise. It strains credibility to argue that the tax rate fall was an important driver of the rising profitability. An increase in corporate profitability, and in turn business investment, is seen as the main driver of higher economic growth following tax cuts.

Warren Buffett and strategist Tom Lee, among others, have both cast doubt on the idea that lower tax rates would necessarily provide a competitive advantage to either corporations or investors.

At the Berkshire Hathaway annual meeting Buffet stated that “it’s certain that some of a lower corporate rate would be competed away.” Lee said that “at the single-stock level, lower tax rates are very quickly discounted by investors.”

In an interview with The Economist, on the other hand, he said that he thinks the 3% growth the administration expects to follow a tax cut is “low.”

Who is right among the economy's experts? Hard to tell, especially now that the erratic president hardly mentions those economic proposals any longer. He is presently too busy dealing with the emerging scandals of his administrations. But let’s not forget that Trump took a course with the Wharton Business School of Economics at Pennsylvania State University and then wrote a book titled The Art of the Deal. At least he says he wrote it even though he does not read more than a page memorandum and his span of attention is 30 seconds. Surely he still thinks he is a brilliant expert on this subject and knows best, as in so many other complex things. Reality will eventually supply the right answer.


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