Corporate the U.S. government, tax avoidance levels are

Corporate tax avoidance is a financial strategy that organisations follow in order to decrease the amount of income tax owed through the use of legal methods.  Tax avoidance is very different to tax evasion; which is the illegal act or practice of not paying taxes (Murray, 2017).  While tax evasion is illegal, tax avoidance is legal and often encouraged by foreign countries.  Corporations participate in tax avoidance by channeling their investments through tax havens, such as The Netherlands or The U.K. (Gravelle, 2009), where corporate tax rates are lower.  Corporate tax avoidance is encouraged by foreign countries because they use the lower tax rates as a method to attract large multinationals, who in turn will increase the foreign tax haven’s GDP through tax revenue.  A large portion of multinationals that participate in tax avoidance are from the U.S, and in a Government Accountability study it was found that in a seven year period 55% of American companies paid no federal income tax during at least one year (White, 2008).  In order to become more competitive and capitalise on the estimated $170 billion that is kept in foreign tax havens each year (Christensen & Murphy, 2004), the American Republican party (the GOP) plans to dramatically overhaul the current American tax system.  The tax reform would cut corporate tax rates from 35% to 20%  (Burman, Nunns, Page, Rohaly, & Rosenberg, 2017).From the perspective of the U.S. government, tax avoidance levels are too high, and based on calculations by NYU professor of finance Aswath Damodran, the software and tech industry, which take up the greatest percentage of taxable income, pay rates of about 7% (Damodran, 2017).  To combat this, the U.S. employs a ‘worldwide tax system’, in which overseas earnings are only taxed if they return to the U.S. (Weisbach, 2017).  Since the American tax reform will have an effect on the actions of multinationals, it is important to analyse and hypothesise how successful the tax plan could reduce corporate tax avoidance in the U.S.; especially on the most profitable industry in the economy.  Leading to the central question: To what extent can the GOP tax plan increase growth by reducing corporate tax avoidance in tech multinationals? The research methods used for this literature review was the systematic review and research synthesis of a wide range of secondary sources, of both qualitative and quantitative nature.  Qualitative sources were used to formulate arguments, while the quantitative sources were used as evidence and figures.  The resulting paper opens with an analysis of the main characteristics of the American tax system and the key principles.  Followed by an analysis of the main American corporate tax principles and how they can be adjusted in order to reduce the rate of tax evasion in America.  Following is an analysis of how paying taxes can be considered disruptive and how tax competition can be justified.  Followed by the discussion section of this paper which is made up of possible improvements to the tax system and an evaluation of how relevant stakeholders should adjust their behavior in order to benefit the economy.  The penultimate research section is a outline for a hypothetical research proposal containing a research question and hypothesis of the outcome.  The final section of this research paper is the conclusion and final remarks.The main characteristics of the current corporate tax system in America are that it is a worldwide tax system, at a high rate (of 35%), and it is complex and difficult to enforce leading to significant tax avoidance (Burman, Nunns, Page, Rohaly, & Rosenberg, 2017).  Contrarily, the characteristics of the new tax system will be a territorial system of taxation at a more competitive rate (of 20%).  Furthermore companies such as Apple have stockpiled cash overseas in foreign subsidiaries, and the new tax plan would give them a one time 10% repatriation fee (Wood, 2017).  The main characteristic of the tax system that should be improved is its complexity. Spanning roughly 75,000 pages, the complexity of the Federal tax rules could be a cause of bureaucratic diseconomies of scale, which are the financial costs that a firm experiences after growing in size.  Considering that tech multinationals are some of the largest firms in terms of both output and size, diseconomies of scale would already pose as a prevalent problem for them.  This along with the fact that most are PLCs looking to maximise profits could be the main reasons that has led them to take up a strategy of tax avoidance.  Thus it makes sense that only lowering the rate of taxation would not be an effective incentive for multinational tech firms to stop corporate avoidance since the bureaucratic diseconomies of scale result in high tax compliance costs (Johansson, Heady, Arnold, Brys, & Vartia, 2008).Another characteristic of the tax system that can be improved is the lack of purpose of the tax principles.  Although the GoP has stated that the purpose of lowering corporate taxes is to bring profits back from overseas and further stimulate the economy, their methods of carrying this out counteract each other.  For example, while the reduction of the corporate tax rate and the one time 10% repatriation fee may work as an incentive for multinationals to bring their profits home, this was done before in 2004 and the result was that multinationals gave these retained profits back to shareholders as dividends (Barro,  2017).  However, the only benefit that investors received was of the value of the tax break, and since it’s only a one-time tax break, there would be no incentive for multinationals to continue to bring home taxes following the increase in repatriation fee.  The result would be a single inflow of money into the economy, rather than continuous stimulation of the economy. The main reason that tech multinationals such as Facebook, Apple, and Google practice tax avoidance schemes is because paying taxes is considered disruptive. Taxes are disruptive for all businesses and markets because they prevent a firm from being able to achieve productive efficiency (Slemrod, 1990).  All of the tech multinationals mentioned are PLCs and as such one of their biggest aims is keeping shareholders happy by profiting.  Taxes impede them from profiting, which provides an incentive to corporations to minimise their tax paid.  Although taxes are disruptive, they are a necessary evil, as they provide a government with the finances to develop an economy.  Thus tax competition among nations is justified since its a method governments can use to increase their tax revenue and possibly as a gauge of how many multinationals pay taxes in your country; with relatively high levels of corporate tax translating to satisfactory levels of tax income.Although the American tax system can in fact be improved, it may still be effective in reducing levels of tax avoidance and increasing growth in the American economy.  Simplifying the tax system would have the effect of reducing bureaucratic diseconomies of scale and paperwork among multinationals when dealing with taxes.  Lower rates of corporate taxation would create a more attractive and competitive climate compared to other countries and in turn possibly attract multinationals to continuously bring their profits back home.  Furthermore, corporate tax rates are negatively correlated with economic growth rates according to data from 1970-1997, with a ten percent decrease in the corporate rate of taxation resulting in an increase by one to two percent in annual growth rates (Lee & Gordan, 2005).  Due to their positive relationship, the increase in GDP would also result in increases in employment, as well.  The potentially large increase in government revenue, would probably be met by increases in government spending and the growth of the economy.  Which would in theory meet the aims the GoP has set for their overhaul of the tax system. However, the levels of tax avoidance are not solely based on the rate of taxation in the home country.  Instead the level of a firm’s tax avoidance is strongly impacted by the level of tax avoidance in the industry (Armstrong, Glaeser, & Kepler, 2017).  Referring back to the calculations of the NYU professor of finance Aswath Damodran, although software companies take up the greatest percentage of taxable income they also have the lowest average effective rate of taxation (of about 7%) when compared to the average effective rate that U.S. corporations pay, which is estimated at roughly 22 percent. (Damodran, 2017). Furthermore, the GOP’s proposal will probably not completely incentivise multinationals to stop shifting their income overseas since by locating intangible assets in zero tax jurisdictions, they could repatriate them tax free due to the change from a worldwide tax system to that of a territorial tax system (Avi-Yonah & Clausing, 2017).  This evidence leads me to believe that the changes in tax policies could have a worse effect on the American economy.  The result could be tech multinationals taking advantage of the new policy by repatriating their goods tax free while continuing to stay in tax havens with lower tax rates such as Ireland. The main stakeholder that adjustments in their behavior could improve the economy are the multinationals.  If the incentives from the new tax plan are strong enough to lead firms to pay taxes in America, it would be beneficial for all stakeholder groups.  Furthermore given that the new tax plan would make America more competitive in theory, the difference in costs could be low enough for multinationals to consider moving their assets from overseas.  However, since they are profit seeking firms, the difference would have to be substantial. However, there is an underlying problem with the GOP’s method of reducing corporate tax rates.  The GOP plans on reducing corporate tax rates from 35% to 20% in one fiscal year, which will pose a problem since the American government is already running on a federal deficit of about $440 billion per year. Tax cuts of 15% would increase the deficit, but other countries such as the United Kingdom used a different method for reducing their corporate tax rates in order to continue to reduce budget deficits.  The U.K. have been gradually reduced tax rates since 2007, and by 2020, they will have reduced corporate tax rates by 13% (Djankov, 2017). An increase in the U.S’s budget deficit would increase interest rates, which would decrease consumption and investment in the economy, which are two factors of economic growth.  Furthermore, the cut in corporate tax would need to be balanced by a growth rate in the economy twice as high as The Conservative Tax Foundation can justify.