How to send U.S. Companies Overseas

A new study shows how the Biden plan would hurt U.S. firms.

By guest authors from the Editorial Board of the Wall Street Journal

Caption courtesy by the Wall Street Journal

We know this doesn’t fit the political times, but surely someone on Capitol Hill must care about what the Biden Administration’s tax plans will do to the U.S. economy. Some economists are starting to do the work of figuring this out, and the results are alarming.

The most comprehensive effort to date at modelling the consequences comes from the Tax Foundation in a report released Thursday, August 12, 2021. The policy shop taps data from the Bureau of Economic Analysis and Internal Revenue Service to develop a granular picture of the global activities of U.S. companies in different industries. This lets it estimate how various tax provisions would hit those companies.

The report’s headline conclusion might please progressives, since the Tax Foundation finds the corporate tax increases would generate additional revenue over the next decade. President Biden’s full plan to increase the domestic corporate tax rate to 28 % and raise taxes on profits earned overseas might bring in USD 1.37 trillion over 10 years. A scaled-back version of this plan proposed by Sen. Ron Wyden and other Democrats might fetch USD 580 billion.

But look closer and even progressives should worry. The major problem is international competitiveness. Treasury Secretary Janet Yellen spent her first months in office signing up for the Organisation for Economic Cooperation and Development’s plan for a 15% global minimum corporate tax. The goal is to narrow the gap between lower taxes abroad and the much higher taxes the Administration wants to impose on U.S. companies’ foreign earnings.

The Tax Foundation warns this ploy won’t work. Since the 2017 tax reform, the U.S. imposes a minimum tax on American firms’ foreign profits (known by its acronym, Gilti, with an effective rate of about 13%). Overhauling Gilti to resemble the OECD plan—setting the rate at 15 % and following the OECD’s standards on exemptions and deductions—would amount to a USD 137 billion tax hike on U.S. companies over 10 years.

But the Administration plans to beef up Gilti by increasing the rate and reducing deductions, which would raise
USD 620 billion more revenue over 10 years, and that’s without the proposed 28 % tax rate on domestic income. That’s how uncompetitive the U.S. tax code would become even with Ms. Yellen’s OECD deal.

Before the 2017 tax reform, U.S. companies stockpiled trillions of dollars of profits abroad to avoid paying steep U.S. taxes on repatriation. Some performed inversions, which meant using a merger or acquisition to shift their headquarters overseas. Both practices stopped once Gilti, for all its flaws, gave U.S. companies the option of bringing profits home without facing crippling tax bills. But if the gap between U.S. and foreign taxation grows as large at the Tax Foundation estimates, companies will have every incentive to revert to their old habits.

Ms. Yellen, the OECD and their progressive cheerleaders pretend they’re targeting only the biggest tech and pharmaceutical companies. The Tax Foundation shows the tax dragnet would be far wider.

Some of the biggest tax hikes would fall on manufacturers in areas such as autos, primary metal manufacturing, computers and electronics. The Administration likes these tax increases, on the theory that the current tax code provides “subsidies” for offshoring via exemptions on the first 10% of foreign income arising from physical investment.

But U.S. companies often locate plants near their customers abroad and supply them with components produced in America based on designs developed in the U.S. Increasing their U.S. tax bill will make these foreign subsidiaries enticing takeover targets for foreign competitors.

The Tax Foundation study makes clear that the Biden tax plan would punish American business and be a gift to foreign competitors. Is it too much to ask Republicans other than Kevin Brady of Texas to notice and try to stop this act of economic masochism?

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