“It’s All Cheap Stuff

Uncle Fred’s ideal business model was to make items that each and every family will need to have at home. Like paper-clips, clothes hangers, curtain, and matches rings. Years later, he added air-conditioners and Post-Its to the list. “It’s all cheap stuff, nevertheless, you make the amount of money on the volume. Imagine if you sold one clothes hanger to each and every person in China just. If you sold it at five cents Even! Be buying you lunch “Id,” I said.

Increasingly sophisticated taxes planning methods can also be contributing to increased tax competition among OECD countries. Statutory corporate and business tax rates provide an incomplete picture of the organization taxes burden because they reflect neither the corporate tax foundation nor investor-level taxes. The EMTR varies depending on the source of finance – equity or debt – because interest is generally deductible, but dividends are not. The mandatory rate of come back for debt-financed investment, therefore, is leaner than the mandatory come back for equity-financed investment compared to the CIT rate.

This lower discount rate also increases the present discounted value (PDV) of depreciation allowances for debt-financed investment. Actually, due to interest deductibility and accelerated depreciation, the corporate EMTR on debt-financed investment is negative for any OECD countries, implying a tax subsidy for debt-financed investment. Thus, in addition to affecting the allocation of capital across edges, the corporate tax affects financing decisions, favoring the use of debt finance rather than equity finance.

Column 2 of Table 1.1 shows the need for depreciation allowances for detailing differences in corporate and business taxes bases (and EMTRs) for OECD countries. A PDV of 1 is the same as immediate write-off (expensive) of investment, while a PDV of zero means that investment is non-depreciable. If the rate of taxes depreciation equals the rate of financial depreciation (and there is certainly zero inflation), then the EMTR for equity-financed investment equals the statutory CIT rate (and the EMTR on debt-financed investment equals zero). Most OECD countries offer accelerated depreciation for equipment investment, such that their equity EMTRs are less than their statutory tax rates.

In comparison to its high statutory CIT rate, the United States has relatively good depreciation allowances for equipment, with a PDV of 79 percent. In the OECD, only Italy and Greece have significantly more ample depreciation allowances. The trend in OECD depreciation allowances within the last two decades has been toward slower depreciation, as countries have at least offset CIT rate slashes with corporate and business bottom broadening partially. The organization EMTRs for equity-financed and debt-financed equipment investment, respectively, for the OECD countries are shown in Columns 3 and 4 of Table 1.1. The U.S. EMTR for equity-financed equipment investment, 24 percent, is above the OECD average of 20 percent but equal to the G-7 average.

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The U.S. EMTR for debt-financed investment in equipment, -46 percent, is substandard for both G-7 (-39 percent) and the OECD (-32 percent). These numbers illustrate the divergent influence of statutory CIT rates on debts and collateral EMTRs. A higher CIT rate produces a higher equity EMTR but a lesser debt EMTR because the worthiness of the interest deduction increases with the organization tax rate. The above-average U.S. statutory CIT rate plays a part in a below-average debt EMTR thus.

Indeed, the United States gets the greatest disparity between collateral and debts EMTRs in the OECD, possibly producing a more pronounced tax bias of funding decisions in America than in other OECD countries. Because U.S. corporations are significantly investing in and contending with corporations in growing markets, comparison of the U.S. Table 1.2 shows statutory CIT rates, depreciation allowances, and corporate and business effective marginal tax rates for three large, emerging market U.S.

China, India, and Mexico. Their domestic statutory CIT rates are close to the OECD average of 31 percent fairly. However, both India and China have levied corporate and business taxes on local and international investors at different rates. In China, as the total statutory CIT rate on domestic companies was 31 percent (equal to the OECD average), special low rates of 15 percent to 24 percent were accorded foreign corporations investing in particular sectors and geographic regions.

Table 1.2: U.S. vs. 24 percent CIT rate. Depreciation allowances in these three emerging-market countries, that have the average PDV of 51 percent, are markedly less beneficial than the OECD average of 75 percent. Despite having domestic statutory CIT rates roughly add up to the OECD average, these three countries’ broad corporate tax bases lead to equity EMTRs that, with an average rate of 34 percent, are well above the OECD average of 20 percent. Firm-level taxation provides an imperfect picture of the tax burden on corporate and business investment because corporate and business profits distributed in the form of interest, dividends, and capital gains are often subject to a second degree of taxes at the investor level.