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.
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.