Despite Donald Trump’s “America first” rhetoric, many suspected that the tax plan he would support would actually increase the incentives for U.S. multinationals to move both profits and operations overseas. I wrote about this inevitability a few weeks ago, before the details of the Trump-GOP tax plan emerged.
Now that the bill is advancing, it’s clear that things aren’t as bad as many feared. They’re worse.
As discussed in the previous piece, Trump administration economic officials argue that by lowering the corporate tax rate from 35 percent to 20 percent and moving to what is called a territorial system—mainly, companies pay taxes on foreign earnings only to the foreign nation where those profits are booked and never owe anything to the U.S. no matter how low the foreign nation’s tax rate is—would lead to more jobs and profits staying in or coming back to the United States.
Yet, it is clear that a territorial system could have just the opposite impact: It could give a permanent preference to foreign income and lead companies to shift more profits to tax havens knowing that they could permanently avoid virtually all taxation on such profits. One crucial safeguard against that perverse impact is to apply a strong minimum tax on the profits of U.S. multinationals in each country (a “country-by-country” minimum tax). If a U.S. company had to pay a minimum tax of, let’s say, 19 percent (as President Obama had proposed), even if they engaged in complex tax planning to book $100 million in profits in zero-tax Bermuda, they would have to pay $19 million in U.S. taxes to ensure the 19 percent minimum tax was enforced. Under such a country-by-country minimum tax, you can run, you can shift profits to tax havens, but you cannot hide from paying a 19 percent minimum no matter where you are. Under this type of true minimum tax on foreign earnings, U.S. multinationals would have little incentive to engage in the ongoing race to the bottom.