Trump's Tax Reform "Global Con" Game

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Posted: Feb 07, 2019 11:11 AM
Trump's Tax Reform "Global Con" Game

Brad Setser is sure to fuel a long debate over the merits of Trump's tax reform. Setser labels it a "global con".

Simple Message

Setser asks: Why would any multinational corporation pay America’s 21 percent tax rate when it could pay the new “global minimum” rate of 10.5 percent on profits shifted to tax havens, particularly when there are few restrictions on how money can be moved around a company and its foreign subsidiaries?

Setser notes: "Despite Mr. Trump’s proud rhetoric regarding tax reform during his State of the Union address, there is no wide pattern of companies bringing back jobs or profits from abroad. The global distribution of corporations’ offshore profits — our best measure of their tax avoidance gymnastics — hasn’t budged from the prevailing trend."

State of the Union Claim

Trump bragged yesterday in his State of the Union Address about tax reform. I commented Trump Delivered His Speech Very Well, But Too Little, Too Late.

Let's not confuse delivery with either substance or agreement.

One of my readers did just that, commenting, "I’m amazed that you gave Trump a pass on his tax policies."

I responded, "Precisely where did I do that? I never said I agreed with Trump about anything other than socialism and wars. He had a good delivery. That does not imply agreement. I certainly disagree on Iran, taxes, drugs, and lots of things."

I expect the same kind of problem here. People will attack Setser, well, just because he is Setser. First, let's tune into what he is saying. Them we can discuss where is is right or wrong, leaving the personality aside.

Global Con Hidden in Trump’s Tax Reform Law

Please consider Global Con Hidden in Trump’s Tax Reform Law, Revealed, a NY Times Op-Ed by Brad Setser.

Last night, President Trump reserved a few minutes of his State of the Union address to praise his tax reform law, which turned a year old last month. To promote its passage, Mr. Trump and his congressional allies promised Americans that drastically lowered corporate tax rates would bring home large sums of capital that had been stashed overseas and finance a surge of domestic investment.

The White House argued they wanted a system that “encourages companies to stay in America, grow in America, spend in America, and hire in America.” Yet the bill he signed into law includes a sweetheart deal that allows companies that shift their profits abroad to pay tax at a rate well below the already-reduced corporate income tax — an incentive shift that completely contradicts his stated goal.

A multinational corporation can route its global sales through Ireland, pay royalties to its Dutch subsidiary and then funnel income to its Bermudian subsidiary — taking advantage of Bermuda’s corporate tax rate of zero.

Eliminating the complex series of loopholes that encourage offshoring was a major talking point in the run-up to the 2017 tax bill, but most of them are still in place. The craftiest and largest corporations can still legally whittle down their effective tax rate into the single digits. (In fact, the new law encourages firms to move “tangible assets” — like factories — offshore).

According to the Treasury Department’s tally for fiscal year 2018, corporate income tax receipts fell by 31 percent, an unprecedented year-over-year drop in a time of economic growth (presumably a time when profits and government revenue should rise in tandem).

For their next trick, the companies worked with their political allies to favorably frame the 2017 tax debate. When he was the House speaker, Paul Ryan was fond of talking about $3 trillion in “trapped” profits abroad. But those profits weren’t actually, physically, sitting in a few tax havens.

As Adam Looney — a Brookings Institution fellow and former Treasury Department official — has explained, companies that needed to finance a new domestic investment could simply issue a bond effectively backed by its offshore cash. (For instance, Apple could bring its “trapped” funds onshore by selling a bond to Pfizer’s offshore account, or vice versa.)

Put plainly, they got the best of both worlds: Uncle Sam could tax only a small slice of their books while they traded with one another based on the size of the entire pie.

Dwarf Economies Giant Profits

Where Setser is Correct

  • There was no money trapped overseas. That was always a lie to get yet another tax holiday.
  • Rather than closing loopholes, the alleged reform created new ones.
  • Corporate tax receipts did decline by 31%.
  • The Double-Dutch (Ireland-Netherlands) strategy has not really been fixed.
  • The 10.5% minimum rate abroad vs the 21% rate in the US still encourages capital and business flight.
  • Worst of all, the new law encourages firms to move tangible assets including factories, overseas.

In short, I agree with every point Setser made above. That is not to say I agree with Setser about everything.

My Disagreements

I do believe in low corporate taxes. Ideally they should be zero. But I also believe in balanced budgets.

People expected Trump to "drain the swap". He didn't. Deficits have soared totally out of control.

And for what? More military spending is the answer.

The worst part of the bill, and one that I mentioned at the time, was that the US corporate tax structure ought to, at a minimum, encourage jobs to move to the US.

The alleged "reform" bill did not fix that basic problem. A good start would have been a tax structure with a higher tax rate on overseas profits than in the US.

Corporations move jobs overseas for a variety of reasons: Taxes, shipping costs, labor differentials. There are many reasons to have multiple factories or be located overseas.

But there is no reason tax laws should encourage that action.

Multiple Failures

  1. The reform did very little for most of the middle class
  2. The reform dramatically added to the deficit
  3. The reform will not release "trapped" money because the money isn't really trapped in the first place
  4. The reform did not eliminate incentives that still encourage business to move overseas

Trump's tax cut was a front-loaded failure on at least four fronts.