TaxProf Blog

Editor: Paul L. Caron, Dean
Pepperdine University School of Law

Tuesday, January 9, 2018

'America-Last Tax Policy': New Law May Drive Factories And Jobs Abroad

New York Times, Tax Law May Send Factories and Jobs Abroad, Critics Say:

In Indiana, Missouri and Pennsylvania, President Trump used the same promise to sell the tax bill: It would bring jobs streaming back to struggling cities and towns. “Factories will be pouring into this country,” Mr. Trump told a crowd in St. Charles, Mo., in November. “The tax cut will mean more companies moving to America, staying in America and hiring American workers right here.”

The bill that Mr. Trump signed, however, could actually make it attractive for companies to put more assembly lines on foreign soil.

Under the new law, income made by American companies’ overseas subsidiaries will face United States taxes that are half the rate applied to their domestic income, 10.5 percent compared with the new top corporate rate of 21 percent.

“It’s sort of an America-last tax policy,” said Kimberly Clausing, an economist at Reed College in Portland, Ore., who studies tax policy. “We are basically saying that if you earn in the U.S., you pay X, and if you earn abroad, you pay X divided by two.”

What could be more dangerous for American workers, economists said, is that the bill ends up creating a tax break for manufacturers with foreign operations. Under the new rules, beyond the lower rate, companies will not have to pay United States taxes on the money they earn from plants or equipment located abroad, if those earnings amount to 10 percent or less of the total investment. ...

“Having such a low rate on foreign income is outrageous,” said Stephen E. Shay, a senior lecturer at Harvard Law School and a Treasury Department official during the Reagan and Obama administrations. “It creates terrible incentives.”

Mr. Shay said the new rule could make a big difference for small and medium-size companies, which make up a vast majority of American businesses. When those companies used to ask him whether to open offices abroad, he advised against it if they needed to bring their cash home.

Such companies, Mr. Shay said, now have no reason to resist the temptation to shift some of their operations abroad, since they would end up paying half the rate they would pay in the United States.

Some companies may not want to leave the comforts of home for a cut in their tax bill. Plants are expensive — they can cost more than $1 billion to buy and to outfit with the necessary industrial machinery. Manufacturers also gravitate toward stable, affordable locales where they can reach their customers easily and hire skilled workers.

“You may prefer to stay in the U.S., with the protections of our legal system, our infrastructure and our labor force,” said Steven M. Rosenthal, an expert at the nonpartisan Tax Policy Center.

On the other hand, for the biggest makers of cars and machines — the kinds of companies that Mr. Trump promised to lure back to the United States — a few percentage points in tax savings can be valuable.

“There are lots of great retail markets out there,” Mr. Rosenthal said. “The new rules might yet encourage jobs and factories to be shipped offshore.”

https://taxprof.typepad.com/taxprof_blog/2018/01/america-last-tax-policy-new-law-may-drive-factories-and-jobs-abroad.html

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Comments

Don't companies have to pay the taxes from the land they are in as well? I.e. if you have a factory in Germany you have to pay German taxes....and then the Co. has to pay the American Rate afterwards correct? I'm asking.....because if that is the case that makes a pretty significant difference.

Posted by: Jacoby Wyatt | Jan 9, 2018 1:57:52 PM

The U.S. has more than 65 bi-lateral tax treaties in effect at this time. The main purposes of these tax treaties are to eliminate potential double-taxation at the nation-state level and to reduce cross-national tax evasion. So corporate entities, which are classed as "persons" under most treaties, can avoid double taxation by complying with the terms of the treaties. If there is no treaty, then double taxation could occur.

Posted by: Publius Novus | Jan 10, 2018 8:12:54 AM

A poor hit piece. Nowhere does it mention that this 10.5% rate is a new minimum tax on certain _intangible_ income (global intangible low-taxed income). This is an anti-deferral provision designed to address base erosion. Combined with the foreign-derived intangible income deduction, it arguably provides an incentive for US corporations to shift more returns from foreign goods to the US, which is the opposite of what this article claims. I don't think US MNCs are celebrating.

Posted by: Mr. C | Jan 11, 2018 9:51:14 AM