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GOP Business Tax Cuts Force Other Countries to Compete

By Dan McLaughlin • National Review

The Republican tax plan has a lot of moving parts, but its centerpiece is a major long-term cut in corporate taxes. American businesses have been eagerly anticipating these cuts, and 2017’s strong stock performances were driven in part by an expectation in the market that they were coming. Liberal critics are apt to downplay the impact that corporate tax rates have on the competitiveness of American business — but the news from around the globe suggests that our economic competitors are very aware of the threat that the “Trump tax cuts” will lure more business back to the United States, or stem the departures of existing businesses, unless they take steps to keep up.

China: The Chinese government may not share America’s view of how to stay competitive, but it recognizes that the Republican plan improves America’s position. From the Wall Street Journal:

In the Beijing leadership compound of Zhongnanhai, officials are putting in place a contingency plan to combat consequences for China of U.S. tax changes as well as expected interest-rate increases by the Federal Reserve, according to people with knowledge of the matter. What they fear is a double whammy sapping money out of China by making the U.S. a more attractive place to invest.

Under the plan, the people say, the People’s Bank of China stands ready to deploy a combination of tools — higher interest rates, tighter capital controls and more-frequent currency intervention — to keep money at home and support the yuan.

An official involved in Beijing’s deliberations called Washington’s tax plan a “gray rhino,” an obvious danger in China’s economy that shouldn’t be ignored. “We’ll likely have some tough battles in the first quarter,” the official said.

From the South China Morning Post:

The most significant tax cut in three decades in the US may trigger a global race to slash taxes to compete for capital. This will particularly concern China, where tax income accounts for up to 80 per cent of fiscal revenue. Premier Li Keqiang has already made tax reform part of his policy agenda, with 1 trillion yuan (HK$1.18 trillion) to be slashed from corporate taxes. But the US move will add new pressure on the central government to act. . . . Some large mainland firms have already moved to the US, partly to escape high Chinese taxes. . . . No wonder the central government is keeping a close watch.

The SCMP asked some Chinese experts what happens next, and Chinese leadership is listening:

As British Prime Minister Theresa May considers plans to cut corporate income tax from 20 per cent to 15 per cent and Japan also mulls over tax breaks, the pressure will only grow on Beijing — especially as foreign investors’ dissatisfaction has become more obvious and entrepreneurs’ complaints about taxes have become louder in recent years.

Xu Hongcai, deputy chief economist of the China Centre for International Economic Exchange, a government think tank, said the Chinese government needed to evaluate the potential impact of US tax cuts and take countermeasures.

“It’s startling to compare China’s income level and tax burden against the United States. [China’s burden] is apparently against the international trend and it should be lowered,” he said. . . . Premier Li Keqiang promised in March to cut the burden on corporations by 1 trillion yuan (US$150 billion) this year, through value added tax reform, fee reduction and tax waiver.

Even the New York Times, in an article headlined “U.S. Tax Bill May Inspire Cuts Globally, While Fueling Trade Tensions,” notes:

Countries like Australia, France, Germany and Japan, all of which have effective corporate tax rates of at least 30 percent, will be under pressure to follow. . . . Some Chinese officials worry that the tax measure will cause more American companies to try to take money out and are mulling new restrictions on capital flows. The newly approved tax incentives could appeal to companies that are frustrated by China’s rising labor costs, ambitious local competitors and tangled legal systems, or that would rather spend their money at home or elsewhere.

Germany: As the Journal noted, “Businesses are particularly concerned in Germany, where prospects for corporate tax cuts faded after the collapse of coalition talks involving Chancellor Angela Merkel and the pro-business Free Democratic Party last month. Germany’s average effective corporate tax rate is roughly 30%, compared with 19% in the U.K. and 12.5% in Ireland.” Handelsblatt Global reports:

German economists are warning that the changes sought by President Donald Trump mean that significant amounts of new investment and jobs will shift from Europe to the United States.

“The tax competition will have a new dimension,” said Christoph Spengel, chairman of the corporate tax department at the University of Mannheim. Mr. Spengel, who is also a research associate at the Center for European Economic Research, and a group of tax experts at the university have done a detailed comparison of the two countries’ tax systems and published a report under the heading, “Germany loses out in US tax reform.”

Clemens Fuest, who heads the Ifo economic think tank, also said he believed German business would suffer. “Investments and jobs will migrate to the US,” he said.

Canada: The Wall Street Journal notes:

Canada . . . faces risks the U.S. will become more attractive on a tax basis, an advantage that could widen should the Trump administration withdraw from [NAFTA]. “Canadian politicians cannot afford to keep taking our competitiveness for granted, as they have been,” said Jack Mintz, head of the University of Calgary’s public-policy school. According to his research, Canadian forestry, power generation, and transportation and warehousing would find themselves at the greatest disadvantage over the Trump tax changes.

Writing at CBC, Aaron Wudrick of the Canadian Taxpayers Federation argues that America’s neighbor to the north also needs to follow our lead, despite recent reductions in individual income taxes:

Previously, Canada could boast about lower business taxes: the Canadian average combined federal-provincial rate of 26.7 per cent, compared favourably to an American average combined federal-state rate of 39.1 per cent. That advantage is now history: with passage of the Tax Cuts and Jobs Act, the new average American rate is just 26 per cent.

Worse still, the Trudeau government is heading in the opposite direction on taxes generally: while it recently resurrected a promise to lower taxes for small business, the general rate is unchanged. It has promised a national carbon tax in 2018, scheduled a payroll tax hike beginning in 2019 to pay for higher Canada Pension Plan contributions, and even introduced an automatic tax escalator on alcohol.

Australia: The Guardian, drawing on reports in The Australian, quotes Australia’s treasurer raising the alarm:

The treasurer, Scott Morrison, has claimed Australia’s economy will be deprived of 1% growth in GDP if parliament does not follow the lead of the US president, Donald Trump, and slash Australia’s headline corporate tax rate. . . . He said Treasury analysis, which was handed to the government this week but not released publicly, has pointed out that Australia may experience a significant recessionary impact and a potential downgrade in revenues if it does not lower its corporate tax rate from 30% to 25% in coming years, in response to Trump’s cuts.

The Treasury analysis, which was given to Morrison’s office, was also given to the Australian, which wrote a story warning that Australia could be “marooned” with one of the highest company tax rates in the world. Morrison is quoted in the story as saying: “The Trump tax cuts are coming. If we fail to respond, they will take Australian jobs, investment and wages with them.”

U.K.: Theresa May signaled as far back as last November that she would try to match Trump’s expected direction on business tax cuts, and is still pressing to do so, although plans for passage have been complicated by the U.K.’s messy Brexit divorce from the EU. The U.K. has also joined with France, Germany, Italy, and Spain in complaining about some of the provisions of the tax bill that are seen as anti-free-trade tax preferences for U.S. business.

Japan: The Journal notes that the Japanese have been ahead of the game, but may be spurred to additional action:

Japan’s government, which is already cutting its main corporate rate to 29.74%, is studying cutting the effective tax rate to as low as 20% for companies that follow certain pro-growth policies. The tax debate in Japan “responds to developments in the U.S. and Europe and is desirable from the viewpoint of competitiveness,” said Takeshi Niinami, chief executive of beverage maker Suntory Holdings.

Prime Minister Shinzo Abe is, however, pressuring companies to raise wages in order to qualify for the cuts.

Denmark: The Danes are also pressing in a supply-side tax direction. Reuters:

Denmark’s government has reached agreement with other parties to simplify one of the world’s most complex tax systems. . . . The growth package agreed between the government, its populist ally Danish People’s Party and the opposition party the Social-Liberals included reducing tax on equity investments to encourage more companies to list in Copenhagen, copying a Swedish and Norwegian model known as investment savings account.

Ireland: The Washington Post claims that Irish leaders are less worried, given their already-low rates. But the Irish Times sees concern:

Irish tax experts say that the US process is a major move to encourage US firms to invest at home. With the Irish government also facing tax threats from EU moves — including a proposed special tax on digital companies to be discussed by EU finance ministers on December 4th — it seems that the the Irish tax advantages to attract FDI here are facing significant challenges . . . said Feargal O’Rourke, managing partner at PwC in Dublin. “There is no doubt that the direction of travel will transform the landscape in the US in terms of corporate tax competitiveness.”

Olivia Buckley, communications director at the Irish Tax Institute, said . . . “US companies will have a lot more to weigh up in the future before making investment decisions outside the US.” . . . The Irish headline corporation tax rate of 12.5 per cent will still be about half the US rate, counting in the new 20 per cent federal rate and state taxes of about 5 per cent. Peter Vale, tax partner at Grant Thornton, said this meant the cut in the headline rate would not provide a major threat to Ireland.

Singapore: The Straits Times reports:

While the tax cut could boost investment flows into the US, the question for Singapore is whether American companies might now re-evaluate their investments here.

After all, as [Withers KhattarWong partner Eric] Roose noted, the difference between the US and Singapore’s corporate tax rates is now just 4 percentage points.

“The general effect overall will be that US companies will do more things in the US and bring their profits back. Companies will begin to reassess their global structures and whether they really need foreign operations, or as much as they have now,” he said.

The discussions going on in these countries will only spread. Also from the New York Times:

“There will be pressure for a new round of lowering corporate taxes,” said Stefano Micossi, the director general of Assonime, an Italian association of publicly listed companies.

Republicans have had a rough time in 2017 relearning how to operate as a governing party in Washington, but the tax bill’s cuts to business taxes are a win for America — and the best evidence of that is the scrambling underway in foreign capitals to match it.