A primal scream on taxes. And why the plan will likely send more, not less, jobs/investment abroad

December 20th, 2017 at 9:56 am

First, I give a primal scream over at WaPo re the tax plan that may well be law by the time you read this.

Next, there’s been a lot of writing, including my own, on the question of whether the plan further incentivizes or discourages offshoring of investment and jobs. I’ve thought so, for a number of reasons, and I’m increasingly convinced that’s the case.

However, the writing on this is often quite technical and dense. So I was glad to see this WaPo piece break it down quite simply. Here are some of the main factors that I expect to juice the incentive of to offshore production, with my bold added.

First, a corporation would pay that global minimum tax only on profit above a “routine” rate of return on the tangible assets — such as factories — it has overseas. So the more equipment a corporation has in other countries, the more tax-free income it can earn. The legislation thus offers corporations “a perverse incentive” to shift assembly lines abroad, said Steve Rosenthal of the Tax Policy Center.

Second, the bill sets the “routine” return at 10 percent — far more generous than would typically be the case. Such allowances are normally fixed a couple of percentage points above risk-free Treasury yields, which are currently around 2.4 percent.

As a result, a U.S. corporation that builds a $100 million plant in another country and makes a foreign profit of $20 million would pay roughly $1 million in tax versus $4 million on the same profit if earned in the United States, said Rosenthal, who has been a tax lawyer for 25 years and drafted tax legislation as a staffer for the Joint Committee on Taxation.

Finally, the minimum levy would be calculated on a global average rather than for individual countries where a corporation operates. So a U.S. multinational could lower its tax bill by shifting profit from U.S. locations to tax havens such as the Cayman Islands.

Simply put, the more factories you build abroad, the more you can cut your tax bill. They set the non-taxable foreign profits high enough that even with the lower rate at home, there’s still a big incentive to produce abroad. And as long as you book some of your profits in non-tax-haven countries, you can send the rest of them to bask on the beach in the Caymen’s.

For a deeper dive, see Gene Sperling, Brad Setser, Kim Clausing.

Why is the other side–the folks who claim the plan will increase onshoring/bringing foreign earnings back home–wrong?

First, some profit repatriation is sure to occur, though there’s no reason to expect it to flow into investment and jobs here as opposed to share buybacks and dividend payouts. That’s the track record, and its likelihood is significantly boosted in this repatriation round as firms are already sitting on more than enough capital to invest and expand if that’s what they wanted to do.

But the main analytic mistake I hear folks making is the use of the wrong delta. That is, they’re looking at the change in the statutory corporate rate–35-21 percent, a big 14 point drop–and keying their predicted response off that. But the true delta, especially for multinationals, many of whom are already paying effective rates well below 21%, is a lot smaller than that. And, as Setser and others stress, the fact that they can still play all the transfer pricing games they’ve long perfected–booking income in low-tax havens; booking deductible costs in higher tax places–along with the three points above from the WaPo piece, suggest more, not less, offshoring.

Trust me, I and others will be keeping a very close eye on this.

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27 comments in reply to "A primal scream on taxes. And why the plan will likely send more, not less, jobs/investment abroad"

  1. Smith says:

    I’m going to repeat what I read on another blog. Obama and Hillary Clinton both favored lowering the corporate rate, and not just to trade lower rates for less loopholes, they actually thought the rate was too high. It was not, it was within a few percent of Germany, France, and Japan. England has lower corporate rate and much higher personal rate, inequality, and Brexit.
    Obama and Clinton also both favored a tax holiday for repatriation. I’m not sure about their position on territorial based taxation, I think it goes hand in hand with everything else. Clinton’s program of an extra $100 billion per year in spending was similar in size to the tax cut, but Krugman said it was too small, perhaps by half, and deficit spending on that scale would be fine.
    Also, with the addition of doubling the child tax credit, middle class couples with two children can expect a boost in after tax earnings of somewhere on the order of 2.5%, near the same amount that Obama traded Bust tax cuts to get payroll cut for one year. This cut is good for at least 7.
    If any politician including Democrats wanted to go after off shoring they could wreak havoc easily. They don’t because they’d have to start with Apple. The Dems are just as cozy with with corps, but less up front about it. Dems the facts.


    • Smith says:

      Also, how do you show a graph that displays the results of allowing the tax cuts to expire in 2027 as an argument against the cuts? That’s ten years from now. People borrow to get money up front for costs accrued later everyday. They’re not going to turn down $1,000 or $10,000 now because of costs later. You’re talking about a nation that lives on credit, mortgages it’s future, pays usurious interest rates on credit cards, car loans, student debt, lives for today, and hasn’t seen a raise in ten years.
      Real hourly pay fell again in November .2%. If not this tax cut, what do you expect to pass? I’ll tell you. Zero, nothing.


    • Smith says:

      On the front page of the Wall Street Journal today, it shows the dramatic fall in tax rates, and in particular the income tax rate, but also the corporate rate. Perhaps you could take a picture of this graphic in order to point out that before 1980 and especially before 1964, when rates were as high as 90 percent on income of $1 million (in 2017 dollars) that the economy was better in every measure. Hourly pay grew faster in line with productivity, also faster, and inequality was half what it is today. The new deficit financed tax cut will boost the economy but doesn’t substitute long term for wage increases, and less offshoring and inshoring exploited immigrant labor. The golden period following WWII from 1945 up to 1964 had those very high rates.

      The graph understates the Reagan cuts because the highest rates took effect at much lower income levels even after adjusting for inflation. Thank you Democrats Speaker Tip O’Neal and Sen Bill Bradley for colluding with Reagan in 1986 to destroy post WWII prosperity and equality. Also a shout out to JFK for kicking the whole thing off.


  2. Ken says:

    Will the profit repatriation cause strengthening of the dollar and a resulting decrease in U.S. exports? One more harpoon launched at U.S. workers.


    • Jared Bernstein says:

      Many moving parts, but I’d bet interest rates and the $ are on the (slow) rise in coming months, having to do with more deficit spending with the economy already close to full emp and the Fed raising rates.


  3. Activist says:

    It doesn’t make any sense, and the press let it make more sense than it deserved simply because Obama and the Clinton’s had been in favor in the past.

    This doesn’t lower the lost of business operations. It doesn’t increase investment. All this does is make rich people happy.

    The only argument I’ve seen that has any merit is regarding the moving of corporate headquarters overseas, and that this might lessen that trend. It won’t. There is much simpler way to do that, and it is simply to force these companies to headquarter in the nation in which they employ the most people. This means that Apple is a Chinese company, GE is who know what, and Goldman Sachs is probably a bitch without a country.


    • Gene Shaw says:

      I would argue it does raise growth temporarily in 2018-19 but creates long term headaches because real final demand is not lifted. It will cause companies to over expand despite final demand not rising and the paper inflation that imo, began in earnest in 2017 will seep out, especially when the bubble pops. That is why inflation has a tendency lately to pop late into the cycle. I have even joked, I am about another 1000 points on the Nasdaq into being a millionare……..lol.

      All the extra growth it created will have to be given back by the early 20’s.


      • Smith says:

        Real demand is definitely lifted. It appears at least 1/3 of the tax cut may show up directly benefiting the bottom 90 percent, on the order of $50 billion a year, which is 1/3 of a percent of national income (1/4 percent GDP), before any multiplier effect.
        It’s questionable whether bubbles are created because there is too much money for the rich to spend, or it’s more a matter of inadequate regulation, especially of the financial industry.
        This country was founded on land speculation, the colonial and early republic ear was notorious for real estate bubbles.


        • Gene Shaw says:

          No its not. That is a pittance needed to handle the capacity they want to build.

          Real demand is boosted by creating real assets. The real economy has been struggling since 2000 and frankly, since 1974. The credit driven illusions and government investment collapsing since 1973 is the real issue behind debt economics.


          • Smith says:

            $100 billion a year is all that Hillary Clinton proposed in extra spending. But unlike the Republican tax cuts which will probably be mostly funded by the deficit, she wanted to completely fund her spending with new taxes. Which do you think counts more as stimulus, deficit funded or tax funded?
            $100 billion is of course 1/2 a percent of GDP, hardly a pittance. A 1/2 percent greater growth in the economy during Obama years might easily have saved us from Trump. Obama would have loved to get an extra $100 billion in spending, and favored lowering the corporate rate and declaring a partial tax holiday for repatriating foreign profits.
            Government investment collapsing is not the real problem. Inequality, industrial policy, reliance on foreign oil, labor relations including the failure of union leadership, erosion of minimum wage, expansion of exempt status, trade policy, WTO and most favored nations status for China, dumping of steel, Democrats desertion of the New Deal, exploitation of immigrant labor, antitrust enforcement, one very needless war, the abandonment of middle America by coastal elites, the list seems endless, all these factors have more to do with a poor economy than government investment. $100 billion a year may be inadequate, and the portion going to the middle class, around $50 billion, too small, but it’s not a pittance. Which is why it could work, same as Reagan, and the 12 years of Republican rule, and the transformation of politics, government, and the economy, that dominates the world we live in today.


  4. Gene Shaw says:

    Jared, there reason why since Byran, Democrats coined the term “job killing tax cuts”. The Republicans spent the entire 20’s cutting income taxes and raising tariffs only to create the situation of 10’s of millions dying of starvation by January 1933.

    These tax cuts will give off the same small short term boost and long term recession. Nothing new under the sun.


    • Smith says:

      I’d strongly dispute that tax cuts and tariffs brought on the Great Depression. Also, 10s of millions were not dying of starvation in the U.S. Unemployment peaked near 20 percent, though automatic government relief didn’t exist. At least check the wikipedia article for competing theories on the causes.


      • Gene Shaw says:

        Then you don’t get history. Tariffs are a very regressive tax. It hurts consumers. It raises prices domestically and when the paper boom ended, consumers didn’t have the raw income to support themselves while the government taxed them while cutting income taxes.

        Yes, there was mass starvation beginning by 1933. The increase of grave and cemetery “production” is the proof. Another 3 years and it would have made the various Chinese famines over the last 500 years and British/Potato famine look like picnics.


        • Smith says:

          Off the top of my head, I’m thinking tariffs couldn’t have the big effect your implying and partly because trade didn’t account for that large a part of the economy. I think it’s only 20 percent today.
          I don’t think you know enough about the Chinese famine in the 1950s or Irish potato famine of the 1840s to discuss the matter, but in terms of absolute numbers and percent of population, I don’t think the Great Depression comes close. There would have to be some great cover up, a secret history your privy too for this to escape my attention. But I’ll do some minimal googling, because it’s an interesting subject. Before I look this up, the Irish toll was in the millions I think and I’m guessing possibly 5 or 10 percent of the population perished. The Chinese death toll was 10 or 15 million which I’m guessing could have been 2 or 3 percent of the population?
          For the Great Depression, there are no historical references to the number of people who starved to death, mass starvation, and I doubt I’ll find easy to google numbers on increased deaths attributable to the downturn. Unlike 19th century Ireland and 1950s China, the U.S. had too much food, so part of the solution to the Geat Depression was to pay farmers not to plant, and also destroy excess food production, to raise prices before every farm went bust.
          Now I’ll need to check this info.


          • Smith says:

            I am spot on mostly with estimates, as Great Depression deaths are fabrications of Russian misinformation (see link below from Pravda) and the excess food production was also true (see wiki article on Depression). Estimate of Irish famine is a bit over in absolute numbers, the figure was 1 million of population 8 million but that 12 1/2 percent perished is close to my 5 to 10 percent given above. China death toll also was correct, in absolute numbers and percentages.

            The only surprise was the source of the misinformation, Russia is obviously trying to cover the Soviet culpability of causing famine in the Ukraine during the early 1930s which did wipe out millions. Thus an incentive to say the U.S. system had similar failures and disaster.
            It does turn out that many health metrics improved during the Great Depression in the U.S. (see link from Smithsonian Magazine).

            This quote below is from an interview with Barack Obama that occurred in Sept of this year and was just released today, appearing in the NYTimes site.
            “One of the dangers of the internet is that people can have entirely different realities. They can be cocooned in information that reinforces their current biases.”
            https://www.nytimes.com/2017/12/27/world/europe/obama-prince-harry-interview.html

            Yeah, I’ll say. Not just different, totally made up by foreign governments too.

            https://www.smithsonianmag.com/science-nature/great-depression-had-little-effect-on-death-rates-46713514/

            http://www.pravdareport.com/world/americas/19-05-2008/105255-famine-0/


        • Smith says:

          I would recommend reading the wiki section on tariffs
          https://en.wikipedia.org/wiki/Great_Depression#Effect_of_tariffs
          It’s still and area of dispute, whether the tariffs had a major impact, but very notable researchers say little or no effect.
          i don’t know what the Russians are saying, but Putin favors trade because his country depends on oil exports, and is threatened by sanctions over incursion in Ukraine, Crimea, (and support for Assad none too popular either)


    • Smith says:

      Deaths from starvation caused by the U.S. Great Depression is Russian propaganda, part of an orchestrated campaign to use social media to change history. Better google a bit about this before spreading crazy stories.

      https://www.smithsonianmag.com/science-nature/great-depression-had-little-effect-on-death-rates-46713514/

      http://www.pravdareport.com/world/americas/19-05-2008/105255-famine-0/


  5. Smith says:

    I wrote earlier a special note about Marc Rubio’s last minute insertion doubling the child tax credit. I don’t know why it didn’t appear, doesn’t show stuck in moderation either. The extra $1,000 per child adds about $36 billion alone to the estimated $50 billion in cuts going to the middle class. The other $14 billion comes from lower rate of 12% from previous 15%. A couple with the median household income of $59,000 and two children can expect to see $1,400 less in taxes. In 2010 Obama signed an $858 billion tax cut, but $976 billion in today’s dollars (adjusting for inflation) and which made the Bush cuts permanent and got a 2% one year cut in payroll tax. Trump’s middle class cut of 2.5% is for seven years at least.
    Again, liberals are not owning up to the fact the Marc Rubio somehow made a huge difference in the average American’s life, the economy as a whole, and Trump’s future. It could the tip the balance into a continued recovery.


    • Smith says:

      After days of rage at the New York Times with all sorts of fake news and opinion masquerading as genuine articles, today the Times backed off. Now instead of predicting the future (vs reporting news) and how the economy will fail and the tax bill is an abomination, they’re consoling their readers with the unpopularity of the president. They say relax folks, we still have Trump. While his polling numbers are at historic lows, one shouldn’t underestimate him, or overestimate the voters of America. Leave it to the Democrats to somehow grab defeat from victory. It’s likely they will take back the Senate and House, which will satisfy the public. This may prevent Trump from further destroying the country, which could ironically help ensure his reelection. And while the Times points out analogies with first term midterm losses of Reagan, Obama, don’t know why Clinton is left out, consider too that all three inherited an economic mess. In contrast, Trump gets a nifty send off from the Obama economy, just enough hurt was left to throw the rascals out.


      • Gene Shaw says:

        lol, Republicans got swept out of Congress in 2006-7 at the height of that cycle. Nobody is voting based on economic interest much like they didn’t in 2016. The real economy has done better this cycle than in the 2000’s, but not nearly well enough to make up the losses.

        People are more up to speed on a paper boom as well. Nobody is buying the results.


        • Smith says:

          The height of 2006-7 cycle was pathetically low. The State of Working America states that income gains for nearly all workers were negligible, as in nearly nothing for most, and negative for many. 37% of all households are renters and not about to enjoy any benefits of a housing boom, just the opposite, it drives up rents. Owners of homes who sell there home benefit exactly how? By buying an equally expensive home? The only way for ordinary voters to profit from a housing bubble is to sell and then not get caught being an owner when the bubble bursts. Nobody does that, except maybe retirees. People taking second mortgages on increased equity or just feeling the wealth effect are not to counter a greater effect of stagnant and falling wages. The housing boom also obviously didn’t affect the economically challenged and rust belt areas the same way it did in more prosperous regions.
          The economy of 2016 was awful, although the liberal press tried to hide this fact. Real hourly pay fell for the year, due to a bad fourth quarter. But for the whole year it was below even Q1 2015. Productivity meanwhile was zero for all of 2016.
          The 2000s set records for poor economic performance, median family income, median wage. Scandals and Katrina also hurt Republicans. There was also a very unpopular war in 2006 associated with the Republicans. It was so unpopular, Trump used his opposition (however disputed) in 2016 to help defeat Jeb Bush.

          People did vote their economic interest in 2006, and 2016. They voted against the party they blamed for a continued economic malaise.

          FRED
          Nonfarm Business Sector: Real Compensation Per Hour (COMPRNFB)


    • Smith says:

      New math, it’s more like $500/per child, and the benefit effectively phases out quickly for couples with income over $100,000 on a joint return.
      New estimate of macro effect. Couples with income over or equal to $43,000 and less than or equal to $101,000 see the full benefit of $500 per child. I think wikipedia on household income has what I need.
      Yes $43,000 is 35th percentile (with some interpolation), $100,000 is 75th, so 40 percent, and average size is 2.4 to 3.0 meaning .6 children if always two adults, but lets say 1/3 of the time it’s one adult and 1.6 children so we get something closer to 1 child per family. This is an overestimate, as there are 77 million children 18 and under, and another 17 million 19 – 22, many of whom are still claimed as exemptions. Lets go with .40 households within income range * 85 million children = 35 million children
      At 500 per child, it’s a $17.5 billion dollar effect. But figure the lower incomes, benefiting less add at least another $3.5 billion. EITC is increased by $400, but I’m not doing the data gathering for it now.
      But wait. It almost escaped me. Even though the middle class only gains $17.5 billion from considering just the exemptions deductions and child credit, the lower rates still give them from $180 to $2400 in that middle 40 percent of households making between $43000 and $1000, gaining $700 at the median of $50,000.
      Also the effect of the Rubio credit is still on the order of $50 billion. Because even if a couple makes over $100,000 and has two children but loses more from the lost exemption than from the extra credit, they’re still taking that credit which would not have been there otherwise.


      • Smith says:

        That should read
        … middle 40 percent of households making between $43000 and $100,000 not
        and $1000
        obviously.
        Also, I should refer to the macro effect of the credit on the order of $50 billion perhaps as the Marco effect.


  6. Activist says:

    I believe there are a lot more college majors in international finance than in international fairness. Except for a few good economists, nobody’s watching this con.



  7. Smith says:

    I have repeatedly complained about liberals and Democrats who bemoan Trump cuts and specifically cuts to corporate rates, but not about Obama and Hilary Clinton favoring the same principle. Obama and Clinton also both favored a tax holiday of sorts for repatriation of foreign profits. Their proposed implementation may have been different and less generous, but this was just a matter of degree. This is important for many reasons, not least of which is that the press hides the truth that the Democrats are similar to Republicans, especially on things that matter like taxes and policy towards corporations. It’s important because the press seems biased in their reporting of Trump’s policies, casting corporate tax cuts as new not something Democrats supported. Economists and columnists bringing up this point. Where was their objection when Obama and Clinton favored lower rates and tax holidays?
    What is particularly disconcerting is the neglect of this aspect until it surfaces later after the fact, beyond when it could influence policy, Republican or Democrat. The New York Times followed this scenario with a story today about the tax cuts. Contrary to what Obama and Clinton thought, rates were not too high. Of course this information is and was available on the internet. It would seem our leaders lacked this knowledge which is pretty basic and essential to the argument for lower rates. One must assume they were poorly advised, but that is not an excuse. Years and years went by with them on record about this and not changing their position. It was part of Clinton’s economic program if she won election.

    What has prompted this comment is a new story in the Times which I’ll quote:
    “The new rate — down to 21 percent, from 35 percent — takes the United States from the top of the global tax spectrum to the lower end. Countries like Australia, France, Germany and Japan, all of which have effective corporate tax rates of at least 30 percent, will be under pressure to follow.”

    Maybe this reporter could have let the Clinton campaign know about that. I included this information in an angry Dec 3 comment previously.

    “There is also this … message that the … economic advisors to Obama and Clinton gave about nominal corporate rates being too high, and not competitive with European countries and Japan. Totally false. It’s within a few points of Germany, France and Japan.”
    http://jaredbernsteinblog.com/if-you-disapprove-of-this-mess-of-a-tax-plan-youre-a-not-alone-and-b-not-a-housesenate-republican/#comment-2153035

    The link to the Times article referenced
    https://www.nytimes.com/2017/12/22/business/tax-bill-global-profits.html

    And to be sure, I’ve never seen this blog promote the idea corporate rates were too high, or needed to be lowered, or otherwise espousing such ideas, and thus not included in my critique of politicians, economists, government advisors, columnists, and the press in general who actively sought and lobbied for that policy.


    • Smith says:

      More explicitly it is poor reporting by the Times to come up with the high rates of Germany, France, and Japan, after the cow has left the barn. Minimally, they could have informed their readers of these facts when the issue was still being decided, when it would attract the most attention, and given the due it deserved, when it could have been the central argument against the cut. It’s very important information. It’s a key to success in anyone promoting a future progressive vision. Instead it’s buried in the middle of an analysis of an issue already decided. Barely news.


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