Navigating Through the Nexus of Corporate Taxation

An interview with Professor Arnoud Boot

It is 2 pm—the first sunny Monday of the year in Amsterdam. As I climb up the almost never-ending stairs of the ABS building, I review my notes—the order of questions I plan to ask and the article structure that can arise from them. Forty minutes later, I leave Professor Arnoud Boot's office with my head buzzing from the information I gained about corporate taxation. What follows is the result of my intellectual adventures at the office of the esteemed professor of Corporate Finance and Financial Markets. 

With the elections in the US coming up this autumn, the discourse about corporate taxation is heating up again after four years. Economists and business leaders await expectantly and are left considering what the results of this presidential election will mean for their own businesses and the economy. In 2017, Donald Trump introduced a new corporate tax rate of 21%, which marked the most significant cut in three decades. These changes are scheduled to be revised in 2025, and, if victorious in the upcoming elections, Joe Biden is seeking to propose an increase in the tax amount that corporations will have to provide. This brings up various questions: Which is the correct rate? What is the most efficient mix of taxation, and is the current system even sustainable? 

In this interview, I will use one of Professor Boot's many publications, Corporate Tax Reform, from the Statement of the Financial Economists Roundtable, as a source. In the paper, the authors describe the current corporate tax system in the United States and explore its efficiency. It is an insightful read; I would recommend it to anyone who is looking to improve their knowledge on the topic. 

Let us begin the interview. 

In your article, you mentioned that the US is at a relative disadvantage compared to countries with other tax systems. Can you explain why this might be the case and which factors play a role in this situation?

A disadvantage is a somewhat negative expression. Yes, on the one hand, the US, with its relatively high corporate tax and low VAT, might hurt the economy's competitiveness, but on the other hand, the country can afford to do so. It is so powerful that this disadvantage can be called a mere nuance. 

Your paper distinguishes between two types of systems: the worldwide tax system and the territorial system. What are the main differences between the two? 

The US uses a worldwide system; this signifies that corporations are taxed on all business activities, including those carried out in foreign countries. This works through companies paying a top-up rate, which is equal to the difference between the tax rate of the foreign country and the US. However, the extra percentage is only due for payment if the money is repatriated back to the US. This aspect encourages corporations to have large amounts of foreign cash holdings. On the contrary, a territorial rate means that corporations are only taxed for their activities inside the country's borders. 

Which of the systems would you say is most efficient? 

It is difficult to evaluate the net costs and benefits of each system. The US historically uses one worldwide rate, which sounds good and seems reasonable in principle, but being able to hoard money abroad creates problems. In the territorial system, transfer pricing issues are very complicated. In an ideal world (which is most certainly not this one), using the worldwide tax system by all countries involved would seem to be the most logical, considering the transfer pricing effect of a territorial system.

Now, we focus on the size of tax rates. Would high corporate taxation drive companies with headquarters in the country out of the US?

In theory, a higher US tax rate can lead to tax inversion, the process of companies leaving the country to seek lower obligations; however, in the case of the US, this is not a danger. The government has so many benefits to offer companies that a high tax rate would not drive them out. Having to pay higher tariffs or risk losing American customers for political reasons is much more dangerous for companies than a couple of percent increase in tax bills. 

I'm slightly turning away from the US and focusing on the general aspects of taxing. What are some other issues you would mention?

Well, firstly, it is important to mention competition across countries. Large multinationals find themselves in an advantageous position with respect to tax attributes compared to domestic companies. This arises from their ability to take advantage of different tax amounts. Shifting profits from one country to the other can significantly decrease a firm's tax bill. Furthermore, multinationals can enjoy the benefits of tax havens, while smaller domestic companies cannot. 

Moreover, it is essential to mention that all kinds of taxes cause distortions. For example, taxing income may reduce people's willingness to consume, or taxing corporation activities may reduce people's sense of investing. 

What would be the most efficient tax if not income and corporations? 

Morbidly, taxing the dead is almost the cheapest. Inheritance taxation, for instance, does not significantly increase distortions. While it is no longer in place in the US, it is in Europe. Moreover, taxing real estate is also a better way to limit distortion. 

VAT is somewhere in between. While it does not put pressure on income and only slightly affects consumption, it can hurt lower-income citizens, which means there is a clear order of efficiency in taxing, starting from the dead and real estate and ending at corporations and income.

Now heading towards politics. As mentioned earlier, the two candidates' opinions on corporate taxation differ in the upcoming elections. What would be the impact of a Trump victory on the field? 

While it is true that, in theory, there is a disagreement between the two presidents, in reality, Donald Trump's actions MAY not change corporate decisions significantly. He emphasizes that cutting the taxes on corporations would increase the willingness to invest, thus resulting in economic growth; however, the reality might be different. The situation is more likely that Trump would like to give benefits to the rich, which he can achieve with a decrease in taxes. His story does not make sense, as he wants to decrease corporate taxation while not increasing other forms of government revenues. 

If not taxation, what would you say is the most significant difference between the presidential candidates? 

It is all about market power. While Donald Trump is a fan of large, dominating corporations, Joe Biden is not and emphasizes the need for competition more. Circling back to taxing, this aspect can also mean a flaw in the Republican president's logic. Reducing corporate taxes only impacts investments by firms with low market power, meaning that a tax reduction would be more efficient in Joe Biden's system. What really matters is the mix, not only corporate taxation. 

How do you see the upcoming elections?

The decisive factor of the upcoming elections will not come down to economic policies enacted during Biden's term. The current president cannot be blamed for his implications, as the US economy has been excellent during his term. Rather, social and cultural issues will be of great significance.

As we slowly approach the end of our interview, I would like to ask you about the effects of the US on European policymaking. Given the country's trend-setting aspect, how does the largest economy in the world impact the European continent and the EU with respect to corporate taxation? 

Overall, the US has positively affected European decision-making on tax. In a sense, the country motivated Brussels to go after tax-avoiding corporations and so-called tax havens. However, with respect to taxing policies in general, nothing conclusive can be argued. Undoubtedly, the US has a huge amount of soft power, but given the vast differences along many decisions, it is not really significant in the sense of corporate taxation. 

Having mentioned positive effects, can you mention any adverse impacts of the US concerning corporations? 

Most certainly. It is always worth mentioning market power. The European Union needs help fighting giant US corporations in big tech. These companies have excessive market dominance, from which concerns of abusing power arise. The EU is trying to decrease the power of these companies with partial success. 

Furthermore, it is essential to mention the earlier agreed corporate compliance policies, like SOX (Sarbanes Oxley Act), back in 2022 and, more recently, the public company accounting oversight board (PCAOB). These actions are adjustments in the US legal system to contain corporate misbehavior; European corporations were also brought into the topic. For example, by having to meet US reporting rules, the country has effectively an extraterritorial impact on European companies. 

We are closing our interview with politics. What impact would a possible change of US presidential administrations have on Europe? 

Donald Trump views the US trade deficit as a disadvantage and a sign of weakness. While it is debatable, he blames the European surplus for his country's alleged disadvantage. In my opinion, this needs to be corrected. The US can afford a trade deficit, and blaming Europe or its tax system for it is simply wrong. 

To sum up, the knowledge acquired from speaking with Professor Arnoud Boot highlighted the complicated subject of corporate taxation and its consequences for the US and Europe. Political leaders' decisions have an important effect on the business community and society as a whole as we navigate the complicated landscape of tax laws.

The upcoming US presidential elections cast a shadow of uncertainty over the future trajectory of corporate taxation. While the debate between worldwide and territorial tax systems persists, the potential impact of tax rate changes also remains a subject of contention. As Professor Boot aptly notes, the efficacy of taxation systems cannot be examined in isolation; instead, a nuanced understanding of market dynamics, government policies, and global economic forces is imperative.

Essentially, Professor Boot's conversation highlights how interconnected the world's economic systems are and how intimately politics, taxation, and market forces interact. The knowledge gained from these conversations is vital in helping us form policies and promote cross-border communication as we set on the path toward economic recovery and sustainable growth.