Out-Competing China Starts With The Tax Code

Two provisions of the 2017 taxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities.
cuts are critical to great power competition.

Tariffs are almost always the main issue connecting the tax reform debate with strategic competition with China. However, some provisions of the 2017 Tax Cuts and Jobs Act (TCJA) should get some of that attention, especially the 100 percent bonus depreciation and the research and development (R&D) amortization.

The major individual tax cuts and reforms introduced in the TCJA are scheduled to expire next year. While much of the focus will be on those individual tax cuts, the business provisions will be important for the U.S. economy’s position in the world, particularly relative to China.

China and the United States might appear to have similar corporate taxes. The United States has a federal corporate income taxA corporate income tax (CIT) is levied by federal and state governments on business profits. Many companies are not subject to the CIT because they are taxed as pass-through businesses, with income reportable under the individual income tax.
of 21 percent and, once various state-level corporate income taxes are added, a combined rate of 25.8 percent. That’s just a hair above China’s standard corporate tax rate of 25 percent. However, statutory corporate taxes tell only a small part of the story. While one obvious difference is that China provides many tax exemptions for specific regions and industries, a more subtle difference is at play, too. The tax code’s base (how corporate income is calculated) is crucial for how a corporate income tax affects the economy. Perhaps the most important part of corporate tax baseThe tax base is the total amount of income, property, assets, consumption, transactions, or other economic activity subject to taxation by a tax authority. A narrow tax base is non-neutral and inefficient. A broad tax base reduces tax administration costs and allows more revenue to be raised at lower rates.
design is how firms deduct investment costs.