Question

Given that in recent years, the governments of many nations have been reducing corporate income tax rates in relation to the US rate (which remains one of the world's highest), is the US tax base shrinkage likely to slow down or speed up? Explain.

Short answer

Foreign reduction in corporate tax rate is likely to speed up US tax base shrinkage.

Step-by-step solution

Basic 

Corporate mergers and takeovers across national borders lead to - shifts of headquarters in other country, or levy of low foreign tax rate for the combined company. It implies lesser tax base for US and lesser corporate tax payment by companies, decreased corporate tax revenue in US.

Explanation 

It is an incentive for companies to do so, based on the reason that US corporate tax rate is highest in the entire world.

Example : Burger King made huge tax savings by taking over a Canadian food chain and shifting headquarters there.

• If the other governments keep on decreasing corporate tax rates relative to highest US corporate tax rates, the mergers and takeovers will become even more lucrative for the US firms. So, the US tax base shrinkage is likely to speed up.