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The new G7 corporate tax plan has been hailed as the right step towards a more ethical tax system. However, does it have any impact on starting a business in the US?
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During the G7 summit in June this year, the G7 agreed on a historic corporate tax reform deal that could have a significant impact on businesses in the United States. At the same time, Americans are apparently more eager to start a business than it has been in decades. As the pandemic’s tough restrictions eased last year, the Wall Street Journal found that the growth in business applications reached its highest level since 2007. However, will the new corporate tax plan have an impact on market entry?
The G7 corporate tax plan
A major criticism of the global tax system is that large multinational corporations can avoid paying their fair share of taxes. According to the Institute on Taxation and Economic Policy, many large multinational corporations either pay significantly lower federal taxes than they should or pay no federal taxes at all.
Many of these large multinationals are headquartered in locations with lower corporate tax rates and therefore hardly pay any taxes in the countries where they sell their products and services. Given that many of these big multinational corporations like Amazon and Facebook are making billions in profits, it is understandable that this has caused significant concern in the US and abroad.
The new G7 corporate tax plan was created to curb this large-scale type of tax avoidance. Under the new plan, countries can tax companies on the income they generate in their country. In particular, they can tax these large multinationals at 20% of profits, provided they exceed a 10% margin. The G7 has also committed to a global corporate tax rate of at least 15%, making it more difficult for multinational corporations to cut their taxes.
This could be our current democratic reality as some polls suggest the majority support higher corporate taxes. This is not to say that other countries will blindly follow suit, and the US should be aware that we are risking competition from Europe and Asia – possibly quite fierce.
Factors that contribute to starting a business
This new business boom could usher in a new era for the United States, especially after the disastrous effects of the Covid-19 pandemic that saw many companies shut their doors. According to the Wall Street Journal, this rapid surge in business applications can be attributed to a variety of factors, including an increase in personal savings, consumer behavior, and a general surge in spending across the country as restrictions from Covid-19 ease.
Texas, California, Florida or Delaware?
It’s worth noting that starting a business in the US seems relatively easy compared to other countries, including most states.
Often the most important consideration for many founders is state taxes, but there may also be other local laws that may benefit investors in the future.
Each state has its own set of rules, in other words the Texas LLC incorporation may differ slightly from others. However, this is not a major obstacle to starting a business. Companies like Tesla have moved their tax base and headquarters to Texas – and many other TECH giants have reportedly left Silicon Valley for similar tax cut opportunities in other US states. However, that doesn’t mean Texas is the only state with low taxes: there are also Delaware, Las Vegas, and Florida. California, on the other hand, attracts businesses for all reasons other than low taxes – and business is still booming.
There are far more severe barriers to entry. According to Forbes, there are a variety of barriers preventing people from starting their business. The biggest of these factors include financial constraints, inexperience, and the lack of a solid business idea. Notably, Forbes also mentions fear of failure as a factor. Around 90% of all startups fail and it is a risk that many do not want to take.
Will the new G7 tax plan affect business start-ups?
Given the factors driving Americans to start a business, the new corporate tax plan is likely to have only a negligible impact on starting a business in the United States. Traditionally, higher corporate taxes have had a negative impact on companies entering the market.
However, the minimum corporation tax rate of 15% is significantly lower than the current federal corporation tax rate of 21%. In addition, some companies may shy away from the new regulations that tax companies in the countries in which they operate. However, this provision is likely to affect certain existing large multinational companies and most new companies will not.
The G7 has put forward a historic corporate tax plan aimed at curbing tax avoidance by some of the world’s most profitable multinationals. A provision to tax companies in the countries in which they sell their goods and services and a corporation tax of at least 15% were hailed as the right step towards an ethical tax system. Starting a business is currently at an all-time high in the US. However, some obstacles can remain. However, the new G7 corporate tax plan cannot be any of these obstacles.