Decision 2024: Tax Talk

October 14, 2024

When I last checked, the U.S. deficit had eclipsed $35 trillion, roughly 120% of GDP. The last time the U.S. had a balanced budget, the iPod had just been released, Britney and Justin were still a couple, and George W. Bush was President. Reducing the deficit will spur economic growth in the long term; but, in order to do so, we must cut taxes, cut spending or both.

So, let’s look at the 2024 candidates’ stated policies for corporate taxes. Vice President and Democratic nominee Kamala Harris aims to increase corporate taxes from 21% to 28% and introduce additional taxes on stock buybacks and multinational corporations. Former President Trump, representing the Republican party, on the other hand, seeks to reduce corporate taxes from 21% to 20%, particularly for domestic production, and implement significant tariffs on imports (another form of taxation that we will address in a following post). Regardless of who wins, action must be taken to prevent tax rates from automatically reverting to 35% when the so-called Trump tax cuts expire at the end of 2025.

There are three ways in which national taxes impact corporate site selection:

  1. National taxes are a location differentiator for projects considering two or more countries.
  2. Effective taxes lower profit and, therefore, lower return on investment and may impact the likelihood that a project moves forward at all.
  3. Countries with high debt-to-GDP ratios are more likely to have higher interest rates, slower growth, and higher taxes long term.

Let’s take them one at a time.

1.      National Taxes as a Location Differentiator

If a company is only considering one country, national taxes are not location differentiators the way state and local taxes are. Most manufacturing projects’ location-dependent costs are largely made up of three factors: energy, transportation, and labor. It’s only in highly profitable manufacturing sectors such as biotech and pharmaceuticals that location decisions are heavily influenced by national corporate taxes. Ireland became a bio-pharma leader in no small part due to its low corporate taxes and favorable tax credits as firms like Pfizer, Eli Lilly, Merck, and others invested billions into Ireland over the last few of decades.

Capital-intensive industries like automotive, metals, electronics, etc., are lower margin and therefore much less influenced by national taxes because it takes time for these investments to turn a profit and have income tax liabilities.

Verdict: It’s a toss-up. Access to supplies and markets, cheap energy, and a productive workforce are much more impactful than income taxes for most projects.

2.      Impact on ROI

National taxes, like all costs, factor into an investment’s ROI. Projects compete for dollars from investors, both internally and externally. If the profits of a planned project fail to meet hurdle rates, they don’t move forward. So, in general terms, higher taxes on profit increase ROI and can put the project at risk. However, as stated previously, many capital-intensive projects aren’t profitable for many years, so other costs, both location-dependent and location-independent such as the cost of raw materials, will have more influence on ROI.

Verdict: Edge to the Republicans. No one is going to argue with lower taxes.

3.      The National Balance Sheet

If an individual or a business goes to the bank to take out a loan, the bank looks at the ability to pay based on cash flow, existing debt, and assets (collateral). The lower your cash flow and collateral and the higher your debt, the higher your interest rate. The same is true for governments, including the United States. The U.S. government sells bonds (debt) to investors. The higher the debt relative to the ability to pay those debts with tax and other revenues, the riskier the investment and the higher the interest rate investors demand.

Long-term, high debt, and high interest rates lead to slower economic growth and a less attractive market for manufacturing companies. The impact of a few percentage points on national taxes pales in comparison to the impact of weaker demand. The only thing worse than paying taxes is having no profits to pay taxes on. Regardless of the results in November, the U.S. will have to figure out a way to wrangle the national debt.

According to a study by the nonpartisan Committee for a Responsible Federal Budget, a Harris presidency could increase the national debt over 10 years by $3.5 trillion while Trump’s policies, if enacted, would add between $7.5 trillion and $15.2 trillion to the national debt.

Verdict: We all lose. It’s hard to know which candidate’s party will make a concerted effort to get our balance sheet in shape. Such a feat would require a disciplined, bipartisan approach hard to imagine in such a polarized political climate.

One caveat- the US dollar is THE store of value around the globe and is, therefore, less exposed than every other country as there is always a demand for US debt.

The Final Score

In conclusion, federal tax rates are not likely to greatly influence the decision of where and whether manufacturers invest. For many industries, the US is the logical choice based on other factors such as market stability and growth, high labor productivity, a business-friendly regulatory environment, and reliable and cheap energy. Nonetheless, the U.S. faces significant fiscal challenges that transcend party lines. While the 2024 candidates propose different approaches to corporate taxation, the underlying economic issues remain a critical concern. The stakes are high, and the path forward demands careful consideration and decisive action so that the United States remains an attractive choice for businesses looking to relocate or expand.

Written by Didi Caldwell, President and CEO, Global Location Strategies

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