Us Tax Case Study

Worldwide v/s Territorial Taxation System

Foreign Direct Investment (FDI) has become a major tool for companies to boost the economic growth in effective manner. Beside US, the rest of other countries are engaged to cut the corporate tax rate continuously for attracting FDI. There are two approaches such as implementing a territorial system and worldwide system to charge tax over the earnings of corporate. The US corporate combined tax rate is second highest among other OECD countries. Due to high corporate tax, there is less attractiveness for FDI. US uses worldwide system for imposing tax in which companies income are subjected to tax on dual basis (Grynberg & Turner, 2003). If a US based corporation is earned profit in the other countries such as in Japan then its earring is subjected to tax liability in both courtiers.

Due to this, many corporations are using tax deferral on foreign source of income. By using this tool, US corporations are enabled to postpone the payment of tax in their home country. This worldwide taxation system is discouraged US corporations to bring the profit back in the home country that is affecting US economic growth significantly. In the territorial taxation system, earnings of organizations are only subjected to tax at the place only where it is earned. If a US based corporation is earned income in the other country like China then its earning is not subjected to tax in US. Due to this, US would not be enabled to obtain tax from US based companies. The profit of such companies would not be used by US under the territorial system of taxation (Mullins, 2006). At the same time, this system is also encouraged tax competition among the source country as under this; the level of tax is determined by the source country.   Due to this, USA is required to cut the corporate tax rate rather than adopting of territorial taxation system. By cutting corporate tax rate, it will enable to attract the FDI and to bring the profit back within the country. Under territorial system, it would not be enabled to bring foreign earnings back (Cockfield, 2010). Due to reduction in corporate tax rate, MNCs would be enabled pay tax over the earnings that may also discourage the use of tax referral system.

Lower Tax Rates Attract Foreign Investment

The foreign investors prefer to invest in the countries with lower tax rates and less rules and regulations of government. Countries those maintain higher business taxes are not able to attract FDI. Foreign investors invest in other countries to earn more profit and if the corporate tax is higher in country then it cannot earn more profit. So, foreign investors prefer the lower tax rate nations to invest and earn more return from their investment (Slemrod & Bakija, 2004). Foreign investors mainly consider the statutory and effective tax rates, while investing in a country. Statutory tax rates are the rates that are required to pay a company according to law of country, while effective tax rates are the actual tax rates paid by a foreign company on all consolidated income after taking the consideration of all tax incentives, deduction and differences across country tax environments (Sabato, 2001). Low statutory tax rates will attract investment from multinational corporations in country.

According to the case study, the US corporate income tax rates is 39.2% that is second highest in the world after Japan. The US tax rate had remained unchanged for 25 years and during these years, country income tax contribution of GDP has been declined continuously. Corporate income tax contribution in the US fallen from 6% of GDP in the 1950 to just 2.1% in 2008 that represents the investors are not preferring to invest in country due to higher rate of tax (Michel, 2011). High corporate tax rates can impact on tax revenue contribution in the country. Outside the US, countries with 1% lower tax rate attracted up to 3% more investment from US. If US can cut its tax rates then it would effectively attract FDI than higher-tax country.

Flat Tax Rate

In current business environment, each country has different tax regime and due to this, corporations are forced to adopt different tax rates. An organization that operates its functions at global level is required to follow the several tax rates that are specified by individual countries. It creates a quite complex tax structure for the companies. The growth of an organization is largely influenced by this complex process of taxation. For understanding and developing the tax amount, organization is engaged to spend huge amount of money from its revenue (Edwards & Mitchell, 2008). Due to different tax regimes, corporations are engaged to appoint several legal advisors and accountants, which increase overall cost of the firm.

At the same time, different tax regimes are also tended organization to involve huge time in calculating the tax as it may create legal controversies for them. In contrast, flat tax rate does not require huge cost and time as in this, only one tax rate is required to consider at global level. From the perspective of cost, a basic flat tax rate should be formulated without considering the place of earning. On the other hand, the application of different tax regimes at global level is also provided an effective floor through which organizations are enabled to manipulate data for rebating tax. This is the main reason due to which many governments are not able to generate revenue from tax (Sexton, 2012). At present time in US, only 12% of all tax revenue is collected from the corporate income tax (Michel, 2011). In order to decrease the complexity of current tax structure, flat tax rate base should be applied. In addition, flat tax base rate is also simple to understand and apply in business activities that help to enhance business performance at greater extent (Hyman, 2010). Due to above reasons, flat base tax rate should be applied in place of different tax regimes.


  • Cockfield, A.J. (2010). Globalization and Its Tax Discontents: Tax Policy and International Investments : Essays in Honour of Alex Easson. Canada: University of Toronto Press.
  • Edwards, C.R. & Mitchell, D. (2008). Global Tax Revolution: The Rise of Tax Competition and the Battle to Defend It. USA: Cato Institute.
  • Grynberg, R. & Turner, E. (2003). Multilateral and Regional Trade Issues for Developing Countries. UK: Commonwealth Secretariat.
  • Hyman, D.N. (2010). Public Finance: A Contemporary Application of Theory to Policy. (6th ed.). USA: Cengage Learning
  • Michel, H.M. (2011. The U.S. Corporate income Tax Conundrum. Case Study.
  • Mullins, P.J. (2006). Moving to Territoriality? Implications for the United States and the Rest of the World. International Monetary Fund.
  • Sabato, Y. (2001). How Taxes Keep High-Tech Investors Away From Israel. Division for Economic Policy Research, 51, 1-25.
  • Sexton, R.L. (2012). Exploring Macroeconomics (6th ed.). USA: Cengage Learning.
  • Slemrod, J. & Bakija, J. (2004). Taxing Ourselves, 3rd Edition: A Citizen’s Guide to the Debate over Taxes (3rd ed.). USA: MIT Press.

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