But wait, there’s more!
The Germans Are Impressed
Europe knows the GOP tax reform makes the U.S. more competitive.
The Editorial BoardDec. 20, 2017 6:44 p.m. ET
Dec. 20, 2017 6:44 p.m. ET
Photo: istock/getty images
The study estimates the cost of capital—the pretax return that an investment needs to earn to be worth making—and finds America had priced itself out of the market. In the ZEW model, U.S. firms needed a return of around 7.6% for an investment to be profitable under pre-reform tax law, compared to an EU average of 6%, and 5.7% in low-tax Ireland.
The U.S. reform changes all this. America’s statutory and effective corporate rates will both be near the EU average, essentially even with Britain and the Netherlands and well below France (a 39% headline rate) and Germany (31%). The U.S. cost of capital similarly falls to around 6%, which is also the EU average.
The ZEW estimates are based on an earlier draft of the bill with a 20% corporate rate rather than the 21% in the final version, but the report does account for immediate expensing of capital investment. The authors say their results wouldn’t be materially different at 21%.
The report also offers insight into foreign-investment incentives after tax reform, which has become one of the stranger controversies in Washington. U.S. companies currently owe the 35% corporate rate on their global income, but only when they repatriate their overseas profits. The reform bill imposes a one-time levy of 15.5% on accumulated profits currently offshore, and then it mainly taxes only income earned in the U.S., with a few modest taxes on some overseas earnings designed to discourage profit-shifting for tax avoidance.
Critics say the reform encourages moving manufacturing out of the U.S. because the anti-profit-shifting rate on foreign income is less than the U.S. domestic rate. This is a bizarre claim since American companies currently enjoy an effective tax rate of zero on overseas earnings as long as they don’t repatriate the profits. Many of them may see effective tax increases under this portion of the bill, and only a liberal would think that’s an incentive.
The ZEW offers a clearer view. It doesn’t specifically account for the reform’s anti-avoidance measures. But its overall conclusion is that while the tax incentives for U.S. companies to invest abroad might become somewhat better since the tax rate for companies that want to repatriate their earnings will be less punitive, the incentives for foreign companies to invest in the U.S. will be much better. Companies from low-tax Ireland, high-tax Germany and the EU as a whole would all see their effective tax rates and their cost of capital for U.S. investment plummet under the reform.
Call it the Get Germany to Pay for American Jobs Act. Don’t be surprised if Germany, France and other high-tax countries follow the U.S. down the corporate Laffer Curve.
Note from Rich: Germany’s top corporate rate when I started auditing overbthere in the early 90s was 53%. It’s been decreasing slowly but surely to 31% where it now stands. Now they are under the gun.
The Germans Are Impressed
Europe knows the GOP tax reform makes the U.S. more competitive.
The Editorial BoardDec. 20, 2017 6:44 p.m. ET
Dec. 20, 2017 6:44 p.m. ET
Photo: istock/getty images
The study estimates the cost of capital—the pretax return that an investment needs to earn to be worth making—and finds America had priced itself out of the market. In the ZEW model, U.S. firms needed a return of around 7.6% for an investment to be profitable under pre-reform tax law, compared to an EU average of 6%, and 5.7% in low-tax Ireland.
The U.S. reform changes all this. America’s statutory and effective corporate rates will both be near the EU average, essentially even with Britain and the Netherlands and well below France (a 39% headline rate) and Germany (31%). The U.S. cost of capital similarly falls to around 6%, which is also the EU average.
The ZEW estimates are based on an earlier draft of the bill with a 20% corporate rate rather than the 21% in the final version, but the report does account for immediate expensing of capital investment. The authors say their results wouldn’t be materially different at 21%.
The report also offers insight into foreign-investment incentives after tax reform, which has become one of the stranger controversies in Washington. U.S. companies currently owe the 35% corporate rate on their global income, but only when they repatriate their overseas profits. The reform bill imposes a one-time levy of 15.5% on accumulated profits currently offshore, and then it mainly taxes only income earned in the U.S., with a few modest taxes on some overseas earnings designed to discourage profit-shifting for tax avoidance.
Critics say the reform encourages moving manufacturing out of the U.S. because the anti-profit-shifting rate on foreign income is less than the U.S. domestic rate. This is a bizarre claim since American companies currently enjoy an effective tax rate of zero on overseas earnings as long as they don’t repatriate the profits. Many of them may see effective tax increases under this portion of the bill, and only a liberal would think that’s an incentive.
The ZEW offers a clearer view. It doesn’t specifically account for the reform’s anti-avoidance measures. But its overall conclusion is that while the tax incentives for U.S. companies to invest abroad might become somewhat better since the tax rate for companies that want to repatriate their earnings will be less punitive, the incentives for foreign companies to invest in the U.S. will be much better. Companies from low-tax Ireland, high-tax Germany and the EU as a whole would all see their effective tax rates and their cost of capital for U.S. investment plummet under the reform.
Call it the Get Germany to Pay for American Jobs Act. Don’t be surprised if Germany, France and other high-tax countries follow the U.S. down the corporate Laffer Curve.
Note from Rich: Germany’s top corporate rate when I started auditing overbthere in the early 90s was 53%. It’s been decreasing slowly but surely to 31% where it now stands. Now they are under the gun.
