Corporate Tax Competition
Tax and other incentive programs, primarily state and local, aimed at attracting new corporate investment have been around for a long time. The primary motivation for states is usually related to jobs and for the corporation, lower costs. A recent, major, proposed transaction involves efforts to induce Foxconn (a key Apple supplier) to build a new facility in Wisconsin.
State and local governments have a wide range of incentives that can be deployed to induce investment in their jurisdictions. However, they do not have any sway over federal tax rates and their effect on corporate investment decisions.
We are now seeing an increasing awareness of the impact of federal corporate tax rates on corporate investment decisions. In the U.S., corporate taxes are clearly a significant part of the ongoing dialogue respecting an overhaul of the U.S. income tax code.
France and Germany have been reported as working on plans to harmonize tax rates across the Eurozone. The objective is a common corporate tax rate with Germany in 2018 which should be the basis of harmonization across the 19 member Eurozone. The renewed drive for harmonization is, in part, related to European efforts to clamp down on tech companies’ tax avoidance strategies.
This also is very much about Ireland’s 12.5% corporate tax rate and efforts of some tech companies to attribute a larger share of profits to Irish operations.
Obviously, tax rates matter. Taxes are a cost of doing business and corporations are generally concerned about costs and competitiveness. Taxing authorities are obviously interested in maximizing revenues. However, jobs are also an important part of the political considerations. It may well be that, an attractive, job creating business climate can increase total tax receipts despite a reduction in corporate tax rates.
All comments and suggestions are welcome.
Walter J. Kirchberger, CFA®