Effective Tax Burden for US Businesses Falls to Average European Level

Donald Trump's plans to reform the corporate tax system in the United States are less radical than previously expected. If the president-elect implements the tax reform plans he put forward during his 2016 presidential campaign, the effective tax burden for US businesses would merely fall to the average European level. This may not only prevent US businesses from engaging in aggressive tax evasion; Trump's tax reform might also have significant implications for global tax competition. These are the findings of a recent analysis by the Centre for European Economic Research (ZEW) in Mannheim.

During his presidential campaign, Donald Trump announced a number of far-reaching changes with regard to corporate taxation. For instance, he plans to reduce the corporate tax rate in the US from 35 per cent to 15 per cent. To compensate for this reduction, tax reliefs are to be eliminated. In addition, foreign corporate profits will be subject to immediate taxation. Under current rules, US businesses can defer taxation until their overseas profits are repatriated. According to the reform plans, previously generated foreign profits will now be taxed at a rate of 10 per cent.

ZEW researchers have calculated the effective average tax rates (EATR) of various countries. On the basis of these calculations, they analysed how the US effective tax burden based on Trump's plans compares to that of other nations, and how the reform affects global tax competition. The research findings have shown that a reduction of the corporate tax rate from 35 per cent to 15 per cent would cause the EATR to fall to 21.2 per cent. With a current EATR level of 36.5 per cent, the tax burden in the US is very high compared to the European average (21.0 per cent).  With Trump's reforms, the US would no longer rank among the world’s highest taxed countries such as Canada, Japan or France.

"Trump's reform plans are not radical"

The reduction in the effective tax burden for US-based companies would also incentivise businesses to rethink their global tax strategy. The findings further suggest that Donald Trump's planned reforms, which require businesses to pay taxes on future foreign profits immediately when they are generated, would eliminate current incentives to shift profits offshore. "Compared to European standards, Trump's reform plans are not radical at all," explains Professor Friedrich Heinemann, head of the ZEW Research Department "Corporate Taxation and Public Finance". The reforms constitute a long-overdue adaptation of the tax burden to meet international standards.

"However, Trump is yet to provide an answer to the question as to how he plans to compensate for the imminent tax losses," says Heinemann. The increase in foreign corporate income taxation resulting from the reforms might prompt many US businesses to rethink their choice of location. "As a result, some US businesses might reappear as European or Asian businesses," says Heinemann.

For further information please contact

Prof. Dr. Friedrich Heinemann, Phone +49 (0)621/1235-149, E-mail heinemann@zew.de