US: Breath of planned tax cuts will increase global tax competition - NAB
|President Trump’s tax cutting plan is particularly ambitious because it covers all US business, not just corporations and the plan’s breadth could step up global tax competition, according to analysts at NAB.
Key Quotes
“Only 5% of US businesses pay tax under the 35% statutory corporate tax system, the other 95% are taxed at their individual marginal rates – like sole proprietors and partnerships here.”
“There are also firms whose profits are not taxed at corporate level but whose owners are taxed at their individual level – the “S Corporations”.”
“Taken together, S Corporations, partnerships and sole proprietors form the “pass-through” sector. Over the years, US business structures have gradually shifted away from the classic “C Corporation”, taxed at corporate level on its earnings, to pass-through operations. The share of pass-through operations in business income has risen from around 20% in 1980 to over half today and there are far more S than C corporations.”
“Tax is a big part of the reason why this change in the operating structure of US business has occurred. The US Office of Tax Analysis estimates that sole proprietors paid an average 13.6% tax rate, partnerships paid 15.9% and S Corporations paid 25% – well below the C Corporation average tax rate of 31.6%, the proposed 35% top personal income tax and existing statutory C Corporation rate. US Treasury estimates also show effective marginal tax rates of 24.4% on pass-through businesses, well below the 29% effective rate levied on C Corporations.”
“As President Trump wants to cut US business taxes to 15%, not just the statutory corporate rate, a way has to be found to deliver tax cuts to 31 million pass-through businesses, paying their marginal personal rates, not just the 1.6 million C Corporates, a big, complex and costly ask! Managing the big gap between President Trump’s proposed top 35% marginal individual tax rate and the 15% business tax rate should pose lots of headaches to a US Treasury trying to limit potential lost revenue.”
“If done, the Trump plan could really ramp up global tax competition – many countries have cut corporate tax rates but putting such big reductions through an entire business tax structure is a much bigger deal.”
“For instance, Australia has introduced lower taxes for unincorporated business with a phased lift in the discount off tax bills reaching 16% by 2026/27 but there is a $1000 annual cap in the tax saving per individual. The US plan looks more generous than ours with no caps or phasing for these tax cuts mentioned to date.”
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