New World, New Policy: How Tax Cuts help U.S companies to go abroad

Professor Michael Czinkota

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 livestock 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 a cold.

After 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 the 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 policies from campaign to the office. This tax proposal shows a continued gain for the strength of the domestic market, but also encourages the exploration of every corner of the world, to help America to be great again.

 

Professor Michael Czinkota (czinkotm@georgetown.edu) 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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