We all want American companies to bring their factories and jobs home but this will not happen until it is financially beneficial for companies to do so.
Unfortunately, politicians often want to go about accomplishing this laudable goal in the wrong way.
As Mihir Desai, a professor at Harvard Law and Harvard Business, points out in the Wall Street Journal, two politicians–President Obama and Republican frontrunner Donald Trump–appear to have the same counterproductive idea on the subject. Desai writes:
Removing the incentive for American companies to move their headquarters abroad is a widely recognized goal. To do so, the U.S. will need to join the rest of the G-7 countries and tax business income only once, in the country where it was earned. Notably, this principle—called territoriality—is included in the bipartisan framework for international tax reform developed by Sens. Rob Portman (R., Ohio) and Charles Schumer (D., N.Y.) in 2015.
Unfortunately, recent reform proposals have a serious flaw: a “minimum tax” on foreign business income. This flaw is in President Obama’s fiscal 2017 budget, and Republican presidential front-runner, Donald Trump, has broached a similar idea on the campaign trail.
The U.S. tax on corporations is one of the highest in the world–35 percent. However, the taxes are deferred until the profits are repatriated. This leads to many businesses being off shore, creating little revenue for the Treasury and fewer U.S. jobs. We're seeing a lot of mergers aimed at escaping the high U.S. tax rate.
Tax reform is supposed to end these distortions, but a global minimum tax on foreign business earnings would undermine reform. The Obama administration’s budget, for example, would end the deferral of taxes on unrepatriated cash and lower the statutory tax rate on corporate income to 28% (still higher than most other industrial nations). A U.S. company would still be able, as it can today, to take a credit on the taxes it already paid to another country. But if the taxes a U.S. company paid to another country were less than 19%, it would be slapped with an additional federal tax. The minimum-tax is dressed up by rhetoric that it will protect jobs at home and ensure that companies pay a “fair share.”
Mr. Trump has recommended a world-wide system without deferral and a much lower rate of 15%. As such, American firms earning profits abroad would still face home-country taxation and the Byzantine system of foreign tax credits that creates numerous tax planning opportunities.
The flaw in both proposals? Corporate tax rates are declining around the world, amid continuing competition for firm headquarters and intellectual property. Ireland taxes most corporate profits at 12.5%. A global minimum tax means U.S. companies earning income abroad would still be subject to adverse U.S. taxes—precisely the distortion that tax reform is supposed to end. Meanwhile, the disincentives to be a U.S.-headquartered multinational firm will persist. …
Ultimately, the proposal for a minimum tax is driven by unfounded fears that American multinational firms pose a risk to the American worker by not showing loyalty to America. This coarse intuition is both naive and wrong. It is naive to assume that U.S. policy makers can exert market power to limit the logic of global opportunities and imperatives. More important, it is mistaken to demonize the foreign operations of American multinationals as working contrary to the interests of American workers.
Instead the evidence, including research by C. Fritz Foley, James R. Hines and myself, suggests that U.S. companies succeeding globally expand at home—contradicting the zero-sum intuition. Demonizing multinational firms plays to populist impulses today. But ensuring that the U.S. is a great home for global companies and a great place for them to invest is actually the best prescription for rising median wages.
President Obama will soon be gone, but if Donald Trump becomes the GOP nominee and then president, his ideas on corporate taxes will have a big impact on the future of the American worker.