Friday, November 3, 2017

Reducing Taxes to Encourage Companies to Move their Headquarters to the U.S.

Being the intellectual center of the world has advantages for economic growth. As headquarters move to the U.S., or any other nation, they bring with them their intellectual capital and significant investment in facilities within their location. To encourage companies to move their headquarters and their manufacturing centers to the U.S. it is necessary to create an investment rich environment by lowering corporate taxes.

High tax rates adversely impacts foreign and domestic investment (Abbas & Klemm, 2013). As the tax rate increases, companies seek to put their money into other markets as each % of tax increase has a direct impact on the bottom line. We have experienced the effects of this phenomenon when U.S. companies invest heavily overseas by moving their administrative offices and manufacturing centers overseas to avoid tax liabilities.

We have to think of this issue from a corporate investment standpoint. When the cost of taxes is significantly lower in countries and the amount of dollars being taxed is in the billions it would be wise to move headquarters overseas if there is no major impact on management or company health. While one could make moral and patriotic arguments, the end result is simply the same...the dollar return on investments makes the difference.

As the tax rate increases it has also has a significant impact on the value of the parent firm and its affiliates in foreign markets. Multinational firms are interconnected to the point where a 10% increase in the tax rate at a company's home country reduces capital stock value at foreign locations by 6.5% (Becker & Reidel, 2012). Firms therefore have big incentives to avoid corporate taxes at their head quarters and all of their subsidiaries.

It can be difficult to calculate such a impact throughout the entire corporate network. Yet it determines whether or not a company should invest or move their head quarters to another country. If the U.S. wants to encourage companies to move their intellectual centers to the U.S. then they will need to offer lower tax incentives. Once these centers are attracted and to American soil other investment opportunities arise as suppliers seek to be near their parent company.

Abbas, S. & Klemm, A. (2013). A partial race to the bottom: corporate tax developments in emerging and developing economies. International Tax and Public Finance, 20 (4).

Becker, J. & Riedel, N. (2012). Cross-border tax effects on affiliate investment-evidence from European multinationals. European Economic Review, 56 (3).

Permission to reprint with appropriate attribution - Dr. Murad Abel

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