While President Joe Biden and his administration claim the 2017 Trump tax cuts need to be overhauled in part because the law incentivizes offshoring, proponents of the GOP tax cuts say there is no tangible evidence to support that assertion.
In Biden’s newly proposed “Made in America” tax plan, which aims to alter the corporate tax structure in order to pay for his $2 trillion infrastructure package, the administration asserts that the Tax Cuts and Jobs Act “created new offshoring incentives.” The president has also hinted that the tax bill moved jobs overseas while on the campaign trail.
“[Former President Donald Trump’s] 2017 tax bill slashed taxes on companies that sent production and jobs overseas,” Biden said during a September speech. “Those corporations then make huge profits by shipping these foreign-made products back to the United States to sell to American consumers.”
Proponents of the GOP tax cuts say the legislation actually encouraged corporations not to offshore — that is, moving production and jobs overseas — and altogether ended corporate “inversions.” Corporate inversions are when a U.S. multinational company merges with a smaller company in a low-tax country to establish residency there and reap the benefits of the lower tax rates without significantly changing its operations in the U.S.
William McBride, vice president of federal tax and economic policy with the Tax Foundation, a nonpartisan think tank that generally supports lower tax rates, said that his organization spent time trying to find evidence that the Trump tax law contributed to offshoring but came up empty-handed.
In the years prior to the Trump tax cuts, corporate inversions were a common occurrence, with dozens of companies merging with foreign associates in order to pay lower taxes. For example, in 2014, Burger King merged with Tim Hortons and became a subsidiary of Canada-based Restaurant Brands International. Fear of more inversions was a major factor in why Republicans were seeking a tax overhaul to begin with.
McBride pointed out that the 2017 tax cuts effectively ended inversions because the U.S. corporate tax rate, which sat at 35% since the early 1990s, was slashed to 21% by the tax bill.
“It ended inversions as far as we can tell,” the tax expert told the Washington Examiner. “It wasn’t a small effect, it completely ended inversions. There have been no inversions that we are aware of since the law was changed.”
McBride said that the centerpiece of the TCJA, lowering the corporate tax rate, was “really the main factor driving the tax cost of producing in the U.S. versus somewhere else.”
“So the whole centerpiece of the tax law was reducing the cost of producing in the U.S., so it would be very strange to find that the effect was the opposite,” McBride said. “In fact, there is no evidence to that effect.”
Sen. Pat Toomey, the ranking member of the Senate Banking Committee and a major proponent of the Trump tax cuts, also pointed to the 21% corporate tax rate in highlighting the effect that the TCJA had on inversions. He additionally attacked the notion that the bill incentivized offshoring of jobs by noting that before the COVID-19 pandemic, unemployment rate was at its lowest level in decades.
“Evidently, President Biden is unaware that immediately following the passage of tax reform, American corporate inversions stopped, and there hasn’t been one since,” the Pennsylvania Republican told the Washington Examiner.
“Moreover, contrary to his assertion that our tax reform caused some dramatic increase in offshoring, in fact, unemployment rates were at historic lows, prior to the pandemic,” Toomey said. “We should be trying to get back to that economy. Tragically, the massive tax increases President Biden is proposing will make it much harder to do so.”
Biden’s newly proposed “Made in America” tax plan seeks to hike the corporate tax rate from 21% to 28%. Pam Olson, a tax expert at accounting and consulting group PwC, told the Washington Examiner that she worries the Biden tax plan could have an opposite effect than what was intended.
“I believe that the 2017 tax act did a lot to attract investment and jobs back to the United States … and that what the president has put on the table will have the opposite effect, it will make us a less attractive place for investment and for jobs,” said Olson, who also served as the assistant secretary for tax policy at the Treasury Department from 2001 to 2004.
The administration has asserted that one of the provisions in the Trump tax bill, the Global Intangible Low Tax Income, known as GILTI, which said that foreign earnings of U.S. multinational companies can be taxed at a rate as low as 10.5%, might encourage foreign investment because they would rather pay that rate than the 21% domestic rate. The Biden tax plan seeks to increase that rate to 21%.
But the Tax Foundation pointed out in a recent report that the U.S. tax on GILTI is “in addition to foreign taxes that U.S. businesses pay on their foreign profits” and that the provision was “designed to have a lower effective tax rate to avoid full double taxation of foreign earnings, but U.S. businesses that pay both foreign taxes and taxes on GILTI are subject to two layers of tax.”
Experts say that while they haven’t found any evidence that suggests the 2017 tax bill increased offshoring, there is little tangible evidence in general about its effects one way or another because so little data is available. McBride explained that it will take a long time to establish what the impacts have been.
Olson said that the claims the Biden administration is making are based off of “nothing but academic theories.” She said that while there has been conjecture that the 2017 tax cuts incentivized offshoring, some of which the White House has cited, “it’s all academic literature, and some of the literature completely misunderstands the facts.”
She said that the reality is that the 2017 provisions intended to hit offshore income were “very effective, in fact so effective that a lot of companies spent time trying to figure out how to move their income entirely within the United States tax system on a current full-tax basis because the regimes that were put in place are not the least bit favorable, in fact, they have quite a draconian effect in many cases.”
McBride also expressed fears about the effects of increasing the corporate tax rate on U.S. jobs. He said that raising the corporate tax rate has a very clear effect on the cost of doing business in the U.S. and raising the cost of business in the U.S. makes it less attractive.
Biden’s tax proposal is facing opposition among Republicans and some in the business community. The U.S. Chamber of Commerce and Business Roundtable have both come out with statements saying that while they support infrastructure investment, they oppose the administration’s plans to raise the corporate tax rate.
The administration is also facing difficulties in the House with a bipartisan group of lawmakers who have demanded the reinstatement of the full deduction for state and local taxes paid, known as the “SALT” deduction, a tax break for the wealthy opposed by many Democrats and most Republicans. Some of the Democrats in the group have vowed not to vote for the tax bill unless the $10,000 cap imposed by the GOP as part of the 2017 tax cuts is reinstated.
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