Reforming U.S. Tax Policy: Addressing Flaws and Proposing Solutions

Flaws in the Current Tax System

The existing tax framework exhibits several significant shortcomings:

Lack of Economic Growth Post Tax Cuts: Evidence following the corporate tax rate reduction from 35 percent to 21 percent in 2017 indicates that there has not been a corresponding increase in investment or economic growth relative to trend levels.
Declining Federal Revenue from Corporate Taxes: The contribution of corporate taxes to federal revenue has consistently diminished, now accounting for less than 10 percent. In contrast, revenue from labor taxation has been on the rise for decades, currently exceeding 80 percent.
Overall Revenue Decline: Due to previous tax reductions, the United States now generates only about 16 percent of its GDP in federal tax revenue, signifying a decline of approximately four percentage points over the past 20 years.
Excess Profits in Tax Havens: A substantial portion of U.S. profits is stored in small tax havens, surpassing the combined profits of major economies such as China, India, Japan, France, Canada, and Germany. Notably, Bermuda, with a population of only 64,000, accounts for 10 percent of all reported foreign profits from U.S. multinationals.

Made in America Tax Plan

To address these issues, the Made in America tax plan proposes various reforms aimed at curbing profit shifting and enhancing competitiveness between domestic and foreign corporations. The key reforms include:

Corporate Tax Rate Increase: Raising the corporate income tax rate to 28 percent.
Global Minimum Tax: Strengthening the global minimum tax applicable to U.S. multinational corporations.
Reducing Low Corporate Tax Rate Incentives: Encouraging global consensus on robust minimum taxes to reduce incentives for foreign jurisdictions to maintain ultra-low corporate tax rates.
Minimum Tax on High-Profit Companies: Instituting a 15 percent minimum tax on the book income of large firms that report substantial profits but demonstrate minimal taxable income.
Encouraging Research and Development: Transitioning from incentives for excess profits derived from intangible assets to more substantial benefits for new research and development activities.
Substituting Fossil Fuel Subsidies: Replacing fossil fuel subsidies with incentives designed to promote clean energy production.
Enhanced Enforcement: Increasing enforcement measures to tackle corporate tax avoidance effectively.

Implications for Large Economies, Including India

Need for Global Cooperation in Tax Policies: While nations have robust incentives to collaborate against tax competition, they are unlikely to halt the race to the bottom unless a sufficient number of large economies implement a minimum tax on foreign earnings.
Transformative Potential of the Made in America Tax Plan: The proposals contained within the Made in America tax plan could serve as a catalyst for other major economies to join the U.S. in adopting strong minimum taxes on corporations, thereby leveling the taxation landscape for domestic and foreign entities alike.