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How United States Corporate Tax Rates Affect Global Market?

by Danial
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Introduction

Governments collect taxes, especially corporate taxes, to ensure viable international business transactions are profitably maintained. The research delves into corporate tax effects on international business. The research looks at some corporations’ tax reduction schemes.  United States corporate tax rates significantly affect international business.

Discussion

The United States Corporate Tax Affects International Business

 The international sector refers to a nation that exports its products and services to a global market. Businesses from the United Kingdom are permitted to market their products in the United States. German companies will sell their products and services in Saudi Arabia. Corporations from Canada will sell their brands in California and New York to current and future buyers. Raw materials can be purchased from China for American companies. In the United States, companies can turn imported raw products into a modern marketable product. Via US businesses, the most recent marketable products will be sold to two markets. The domestic business in the United States is the first field, and the foreign market is the second. Both countries are included in the global market universe of US companies. Importing nations are also responsible for paying duties and taxes on imported goods. Section 482 of the United States Tax Code lists the numerous importing duties (Paul 239).

Furthermore, the United States’ income tax has an effect on international markets. The cash inflow levels applied to selling US companies’ products in the global economy are smaller as tax rates are higher. Companies in the United States can only commit 62 percent of their total annual taxable income to selling their products and services in the worldwide economy, due to a tax rate of 38 percent. Companies in the United States can only commit 66 percent of their total annual taxable income to selling their products and services in the global economy if they incur a 34 percent tax rate. With a 15% tax rate, US companies can commit just 85% of their total annual taxable income to developing and selling their products and services in the global market (Whittenburg and Altus (2010) 35).

How United States Corporate Tax Rates Affect Global Market?

Higher United States Taxes Discourage Imports into the United States Market

With the high tax rates, companies located in other countries may be discouraged from selling their products in the United States market. Some corporations located in United Kingdom will prefer to sell their products locally because the local corporate tax rate (30 percent) is lower than the United States corporate tax rate (39 percent), reducing United States imports.  Likewise, several corporations located in Canada will prefer to sell their goods within Canada because the local corporate tax rate (36 percent) is lower than the United States corporate tax rate (39 percent), lessening United States imports.  Some corporations located in Ireland are persuaded to sell their products within Ireland because exporting their products into the United States marketplace with unfavorably higher 39 percent corporate tax profits is less profitable (Whittenburg and Altus (2010) 35).  With higher tax rates, the exporting countries will receive lesser after tax cash inflows from selling their products current to future customers in the United States (Whittenburg and Altus (2010) 453).

Tax Rate Adjustments will Increase United States Imports

To increase the United States imports, the United States government must institute better tax rates. The United States government must lower the United States tax rates to more allowable levels.  The United States government can lower the tax rates to a figure that will be near to the 30 tax rate level. This level will encourage the United Kingdom corporations to sell their products in the United States marketplace.  Further, the United States government can lower the tax rates to near Ireland’s 13 percent tax rate level. This level will persuade the Irish corporations to export their products into the United States stores. The United States government can lower the tax rates to a rate closer to the 36 tax rate level. This level will entice the Canadian corporations to market their export quality products to Canada’s next door neighbor, the United States (Czinkota  453).

Examples of How Some Companies Operate Overseas to Avoid the United States Corporate Tax

There are several companies benefitting from the diversity in each country’s corporation tax rates. With higher tax rates, the United States companies pay higher income taxes. Consequently, the corporations’ cash inflow equals the total yearly taxable income amount minus the tax amount collected. For Example, the annual net income is $400,000. The corporate tax amount collectible is $ 113,500 plus (34 percent x [$400,000 -335,000]). Consequently, the corporate tax amount is $135,600 or ($221,000 + $113,500).  The United States Corporation will only keep in its coffers the net after tax amount of $264,400. Consequently, the United States Corporation can only use the $264,400 for its global marketing strategies, not the entire $400,000.

United States Government Uses Taxes to Ensure Conducive International Marketing

In turn, the United States government uses the taxes collected by the United States Corporations to enhance the global business environment.  Better business environment includes better roads. With better roads, the United States Corporations can easily transfer the goods from the manufacturing sites abroad into the United States stores, customer’s homes, and other strategic marketing locations.  Additionally, the United States government pays its police forces to keep the United States territories safe for business transactions.

Any corporations work outside of the United States to escape paying taxation in the United States. The rates range from the lowest to the highest percentage tax rates. The lowest tax rate is 15 percent. The highest tax rate is 39 percent. One tax rate bracket requires the United States corporations to pay 34 percent tax plus an additional $113,500 when the annual taxable income is more than $335,000 and not more than $10,000,000. Another tax bracket shows that the United States corporations must pay 15 percent tax if the annual taxable income is $50,000 or less.  Lastly, the corporation should pay 35 percent tax on the annual taxable income plus $3,400,000 if the annual taxable income is more than $10,000,000 and not more than $15,000,000 (Whittenburg and Altus (2009) 11). 

Demonstrate How the United States Tax Compares to other Countries

Corporate Tax Rates of Different Countries

Table 1

Tax Rates of Different Countries

Country Tax Rates
United States 39 percent
Spain

 

35 percent
United Kingdom 30 Percent
Canada 36 percent
Ireland 13 Percent

Table 1 clearly shows that the tax rates of different countries will persuade the United States corporations to set up their stores in London, France, or any other global city. The corporations will pay corporate taxes at a lesser amount when the production and sales facilities are set up in Spain (4 percent tax savings). Spain’s tax rate is four percent lower than the United States tax rate.  The United States corporations can save nine percent on corporate taxes when the production and sales facilities are strategically located in the United Kingdom. The United Kingdom’s tax rate is nine percent lower than the United States’ tax rate. Lastly, The United States corporations can save four percent on corporate taxes when the production and sales facilities are sited in Ireland. Ireland’s tax rate is 26 percent lower than the 39 percent United States tax rate (The Chairman of the Council of Economic Advisers 167).

Effects of Corporation Tax on the United States Gross Domestic Production (GDP)

The changes in the Corporation Tax rates affects the United States Gross Domestic Production (GDP) with higher taxes; the company has lesser cash inflow percentages allocated to United States Gross Domestic Production.  For example, when the United States companies’ tax rate is 25 percent, the United States corporations can use 75 percent of the total taxable income to produce goods.  When the United States companies’ tax rate is 34 percent, the United States corporations can only use the lower 66 percent of the total taxable income to produce goods. Lastly, when the United States companies’ tax rate is 39 percent, the United States corporations can use 63 percent of the total taxable income to produce saleable products (Palan 65).

Funds are Needed to Promote International Trade

Further, business corporations, such as the international company Step Two Toy Company, use funds to sell more products and sell in more locations.  The business entities pay salespersons to sell the corporations’ products and services. The salesperson needs funds to advertise the company’s international selling products and services.  The same marketing personnel need money to entertain high value prospective customers.  High tax rates reduce funds needed to fund the United States business corporations (Czinkota 454). 

In terms of production expenses, the corporations need cash to set up a new production plant. The corporations need to purchase raw materials. The corporations pay the factory workers to convert the raw materials into saleable product.  The corporations must allocate funds to pay for the electricity expenses, water expenses, and telephone expenses. The same businesses need funding to cover the costs of manufacturing department repairs and maintenance. Higher tax rates would lower the amount of cash on hand used to run a modern manufacturing plant (Hansen 30).

Some Companies Operate Overseas Avoid Payment of US Corporate Taxes

Any corporations work outside of the United States to escape paying taxation in the United States. Corporations must pay phased taxation whether they work within the United States’ territories. Graduated taxes relate to the idea that the tax rate grows as the net profits of the corporate company rises. The income tax rates in the United States vary from the lowest to the maximum percentage tax rates in the world. The lowest tier of taxation is 15%. The largest rate of taxes is 39%.

Sample Tax Computation

Several examples will clarify the tax rate explanation. One tax rate bracket requires the United States corporations to pay 34 percent tax plus additional $113,500 when the annual taxable income is more than $ 335,000 and not more than $10,000,000. Another tax bracket shows that the United States Corporation must pay 15 percent tax if the annual taxable income is $50,000 or less.  Lastly, the corporation should pay 35 percent tax on the annual taxable income plus $3,400,000 if the annual taxable income is more than $10,000,000 and not more than $15,000,000 (Whittenburg and Altus (2009) 11). The relationship between the United States tax rates and the United States Gross Domestic Production is shown in Table 2.

Tax Rate in Relation to United States Gross Domestic Production (GDP)

For the United States business corporation, Table 2 shows that the tax rate increase is not directly proportional to the United States Gross Domestic Production (GDP).  The September 2011 percentage, 9.7 percent, is favorably lower than the December 2010 percentage, 9.97 percent.  The December 2011 percentage, 10.2 percent, is unfavorably higher than the December-September 2011 percentage. The September 2012 percentage, 11.0 percent, is unfavorably higher than the September 2011 percentage.

Table 2

Percentage of US Corporate After tax Profit based on corresponding monthly GDP

Month Percent
September 2012 11.0  percent
December 2011 10.2 percent
September 2011 9.7 percent
December 2010 9.97 Percent

                                 Source: YCharts <http://ycharts.com/indicators/corporate_profits_usgdp>

Conclusion

Summarizing the above discussion, it is normal for governments to collect taxes, including corporate taxes. The taxes are used to maintain an environment that is conducive to engaging in business transactions. Business transactions include both local business activities and global marketing activities. The research delves into tax effects on international business. Some corporations engage in tax reduction schemes in international trading.  Evidently, the United States corporate tax rates materially affect both local and international business transactions.

Works Cited
  • Czinkota, Michael. International Marketing. New York: Cengage Learning, 2007. Print.
  • Hansen, Don. Cost Management. New York: Cengage Learning, 2009. Print.
  • Paul, Justin. International Marketing . New York: McGraw-Hill, 2008.Print.
  • Palan, Ronen. Tax Havens: How Globalization Really Works. New York: Cornell University Press, 2010. Print.
  •  The Chairman of the Council of Economic Advisers. “The Economic Report of the President (2009).” U.S. Government Printing Office, The U.S., Government Printing Office, 2009. Web. 22 Feb. 2013. < http://www.gpo.gov/fdsys/pkg/ERP-2009/pdf/ERP-2009.pdf>
  • Whittenburg, Gerald E., and Martha Altus. Income Tax Fundamentals. New York: Cengage Learning, 2009. Print.
  • Whittenburg, Gerald E., and Martha Altus.  Income Tax Fundamentals . New York: Cengage Learning, 2010. Print.
  • YCharts. United States Corporate Profits After Tax a Percentage of GDP, n.d. Web. 22 Feb. 2013.  <http://ycharts.com/indicators/corporate_profits_usgdp>

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