In late 2017, the federal government passed a sweeping tax bill called the Tax Cuts and Jobs Act (TJCA). The legislation enacted several significant changes to the tax code, including reducing the top federal corporate income tax rate from 35 percent to 21 percent.

Does the new law mean big changes for corporate America’s site selection decisions? This blog post examines how America’s rates now compare with the rest of the world.

What were the U.S. corporate tax rates before the new law?

The TJCA reduces the federal corporate income tax rate to a flat 21 percent.

Previously, the federal corporate income tax was broken up into four brackets based on taxable income as demonstrated in the chart below.

Previously, most corporations operating in the U.S. were levied either a 34% or 35% tax rate on taxable income. The TCJA eliminates these four separate brackets and levies a single tax rate of 21 percent, reducing the federal corporate tax rate for most corporations by 13 to 14 percentage points.

Where does the U.S. rank in terms of corporate income tax rates?

Before the TCJA, the U.S. had the highest statutory corporate income tax rate and the fourth highest effective tax rate among the G20 countries, as the below chart demonstrates.

Chart Source: Congressional Budget Office 2017 International Comparisons of Corporate Income Tax Rates. Note: The CBO analysis compared worldwide tax rates from 2012 (the most recent data available for all countries). Since 2012, four G20 countries have reduced their statutory tax rates – Japan, South Africa, the United Kingdom, and now the United States.

However, due primarily to national tax systems’ treatment of depreciation and the sources of financing for investments, there is a significant difference between statutory rates and what companies actually pay in taxes: The Congressional Budget Office 2017 analysis below shows that the U.S. levied an effective corporate income tax rate (average federal, state, and local combined) of only 18.6 percent, more than 20 percentage points lower than the top rate of 39.1 percent.

Chart Source: Congressional Budget Office 2017 International Comparisons of Corporate Income Tax Rates

What is the effective corporate income tax rate after the TCJA?

A proportional reduction of the 2012 effective tax rate results in a roughly 12 to 13 percent effective tax rate, improving our ranking by three spots, closer to rates in India, Mexico, and Indonesia.

So, what’s the rate reduction’s impact on site selection in the U.S.?

All other site selection factors being equal, lower corporate income tax rates that increase after-tax returns on investment make a place more attractive. However, the reality in corporate site selection decisions is that no two countries are “all-else-equal.” Corporate income tax rates are almost never as high on the list of global site selection factors as labor availability and quality, operating and capital costs, accessibility, supply chain, and business environment stability.

If there were to be an “all-else-equal” comparison to the U.S., Canada would likely be the closest to the U.S. in terms of labor force and geography. TCJA’s corporate tax reduction does make the U.S. more competitive to Canada’s statutory tax rate (26.50 percent for Ontario and 26.70 percent for Quebec) and effective tax rate (8.5 percent in 2012) and could marginally influence site selection decisions considering the two countries.

Stay tuned: Part two of this four-part series analyzes the new law’s impact on taxes for multinational corporations.