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Trump’s Tax Reform Will Help End Offshore Tax Loopholes & Create Jobs

- October 25, 2017

President Trump's tax framework would discourage offshoring and corporate inversions, spur investment, and create over one million jobs

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TOP TAKEAWAYS

  • The United States' high corporate tax rate, in conjunction with a tax structure that taxes foreign income only once it is transferred to the U.S., encourages U.S. multinational corporations to keep their foreign income in countries with lower tax rates.
  •  According to an independent analysis, the U.S. government loses out on $100 billion in tax revenue per year, an amount equivalent to roughly one-third of annual corporate tax income.
  • At least forty-seven companies have relocated their headquarters overseas in order to take advantage of lower tax rates from 2004-2013 compared to only twenty-nine from 1983-2003.
  • President Trump's tax relief package would eliminate the incentive for corporations to keep foreign earned income abroad, resulting in capitol returning to the U.S. so it can fuel job growth in America.
  • According to one study, moving to a territorial tax system, which is proposed in Trump's tax framework, would create at least 1.46 million new jobs and significantly increase GDP growth.
  • Many independent U.S. advisory boards, working groups, and federal agencies tasked with exploring tax reform have recommended that the U.S. move to a territorial system.

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OFFSHORING OF INCOME AND INVERSIONS BY U.S. MULTINATIONAL CORPORATIONS ARE BOTH A RESULT OF A BROKEN U.S. TAX CODE

The Current U.S. Tax System Incentivizes Corporations To Keep Foreign Earned Income Overseas

The U.S. Has A Worldwide Corporate Tax System, Which Means The Government Taxes The Difference Between "What Multinational [Corporations] Pay Abroad And Would Pay Here When They Bring Their Overseas Earnings Back Home." "The United States has what's called a worldwide corporate tax system. That means we tax the difference between what multinationals pay abroad and would pay here when they bring their overseas earnings back home." (Matt O'Brien, "Apple's Borrowing Abroad Signals Broken Capitalism," The Washington Post , 11/5/14)

The United States Taxes All Corporate Earnings At 35 Percent Regardless Of The Location Of Those Earnings, But Foreign Earnings Are Not Taxed Until They Are Repatriated To The United States. "Under current law, the United States taxes the worldwide income of resident multinational corporations. This means that so long as a corporation is considered a resident in the United States, all its earnings are subject to U.S. tax of at least 35 percent regardless of the location of those earnings. Foreign earnings, however, are not taxed until they are repatriated or brought back to the United States." (Kyle Pomerleau, "Designing A Territorial Tax System: A Review Of OECD Systems," Tax Foundation , 8/1/17)

  • Current U.S. Laws Allow Corporations To Defer Paying U.S Taxes On Foreign Income Still Held Overseas. "Much of the money held overseas was part of GE Capital as part of a vast international lending business. Laws passed over the last two decades have enabled companies to defer paying taxes on those earnings, to the consternation of lawmakers and corporate critics." ("G.E.'s Retrieval Of Overseas Cash Highlights Tax Debate," Bloomberg , 4/10/15)

This Tax Structure Encourages U.S. Multinational Corporations (MNC's) To Keep Income Earned Outside The U.S. In Countries With Lower Tax Rates. "The current U.S. system, along with a relatively high corporate tax rate, has features that both encourage U.S. MNCs to shift income out of the country to lower-tax jurisdictions and discourage U.S. MNCs from repatriating their active foreign source earnings to the United States. These profit-maximizing behavioral responses to the current system have negative effects on both the U.S. economy and the MNCs themselves."(Eric Drabkin, Kenneth Serwin, and Laura D'Andrea Tyson, "Implications Of A Switch To A Territorial Tax System In The United States: A Critical Comparison To The Current System," Berkeley Research Group , 11/13)

The Perverse Incentive Created By The Current Tax Structure Has Negative Impacts On The U.S. Economy

Companies Like Google Can Save Billions In Taxes By Keeping Their Foreign Profits In Overseas Bank Accounts. "In October, Drucker reported that Google had saved $3.1 billion in taxes in the past three years by shifting the majority of its foreign profits into accounts in Ireland, the Netherlands and Bermuda using financial techniques called 'the Dutch Sandwich' and 'the Double Irish' arrangement." ("How Offshore Tax Havens Save Companies Billions," NPR , 3/17/11)

Income Shifting Harms Corporate Tax Revenue, Investment, Production And Employment In The United States. "Income shifting leads to lower corporate tax collections and lower investment, production, and employment in the United States." (Eric Drabkin, Kenneth Serwin, and Laura D'Andrea Tyson, "Implications Of A Switch To A Territorial Tax System In The United States: A Critical Comparison To The Current System," Berkeley Research Group , 11/13)

The Effects Of Deferred Repatriation, Or Money Held Overseas, Include Less Economic Income That Is Available To Finance Economic Activity Inside The United States Because Earnings Held Abroad Are Not Directly Available To MNC's To Boost Domestic Consumption And Investment. "Less income available to finance economic activity in the United States: Earnings held abroad by U.S. MNCs are locked-out of the U.S. economy in that they are not directly available to the MNCs for domestic uses. Were these earnings returned to the United States, they would boost overall domestic consumption and investment-both directly by the repatriating firms and indirectly through profit-maximizing shareholder behavior." (Eric Drabkin, Kenneth Serwin, and Laura D'Andrea Tyson, "Implications Of A Switch To A Territorial Tax System In The United States: A Critical Comparison To The Current System," Berkeley Research Group , 11/13)

  • According To Capital Economics, U.S. Firms Shifted $2.5 Trillion Overseas In 2015 Due To "The Substantial Tax Bill Most Firms Would Face" If They Brought The Money To The U.S. "The cash held overseas by US firms has continued to grow at a rapid pace, rising to almost $2.5tn in 2015. The substantial tax bill most firms would face if they attempted to bring this cash home, however, means that it is still very unlikely to ever be repatriated under the current system." (Paul Ashworth, Michael Pearce, and Andrew Hunter, "Firms Continue To Hoard Cash Overseas," Capital Economics , 09/19/16)

Earnings Held Offshore Are Excluded From The U.S. Corporate Tax Base, Reducing Corporate Tax Revenues. "Lower U.S. corporate tax revenues: Earnings held abroad by U.S. MNCs are locked-out of the U.S. corporate tax base. The U.S. Treasury collects no revenues on these earnings unless and until they are repatriated." (Eric Drabkin, Kenneth Serwin, and Laura D'Andrea Tyson, "Implications Of A Switch To A Territorial Tax System In The United States: A Critical Comparison To The Current System," Berkeley Research Group , 11/13)

  • According To One Independent Analysis, The Government Misses Out On $100 Billion In Tax Revenue A Year, Roughly One Third Of The Annual Corporate Tax Revenue, As A Result Of Corporations Using "Tax Reduction Maneuvers." "Independent analysts estimate the federal government misses out on more than $100 billion a year in corporate tax revenues as a result of tax reduction maneuvers. That is equal to one-third of the $300 billion in annual corporate tax revenues." (David Morgan, "Republicans Debating Remedies For Corporate Tax Avoidance," Reuters , 6/18/17)

Further Exacerbating The Situation, America's High Corporate Tax Rate Incentivizes Large U.S. Firms To Avoid Paying U.S. Taxes Through A Corporate Inversion

The Top Corporate Income Tax Level In America Is 35 Percent, In Ireland It Is 12.5 Percent, And In Some Countries Like Bermuda There Is No Corporate Income Tax. "The top corporate income tax level in the United States is 35 percent. In the United Kingdom, it's 28 percent. But in Ireland, it's only 12.5 percent, and in Bermuda there's no corporate income tax at all. That means multinational companies that shift their earnings through Ireland or Bermuda can save billions of dollars in taxes each year." ("How Offshore Tax Havens Save Companies Billions," NPR , 3/17/11)

Consequently, The Current Tax System Incentivizes Companies To Move Their Corporate Headquarters Outside The United States Through The Use Of Corporate Inversions. "In some cases, the system incentivizes companies to avoid the domestic tax on their foreign profits by moving their corporate headquarters out of the United States. As a result, the U.S. worldwide system has been one of the major drivers of corporate inversions in the last few decades." (Kyle Pomerleau, "Designing A Territorial Tax System: A Review Of OECD Systems," Tax Foundation , 8/1/17)

  • An Inversion Occurs When A U.S. Company Is Acquired By A Small Foreign Corporation In Order To Adopt Its Tax Domicile And Reduce The Combined Corporations' U.S. Tax Burden. "Tax inversions occur when a U.S. company is acquired by a smaller foreign business from a low-tax country and adopts its domicile to reduce the combined firm's overall U.S. tax burden." ("The U.S. Is Cracking Down On Corporate Tax Inversions," Reuters , 10/14/17)

Corporate Inversions Allow U.S. Corporations To Access Offshore Earnings Without Bringing Them Back To The United States. "US multinationals frequently invert to permanently sidestep future U.S. tax on their offshore earnings. A multinational group headed by a foreign company often can access offshore earnings without ever bringing the money back to the United States." (Steven M. Rosenthal, "This Is The Easiest Way The U.S. Can Stop Corporate Tax Dodgers," Fortune , 4/11/16)

Despite Congressional Efforts To Stop Corporate Inversions In The Past, Many Large U.S. Corporations Have Moved Their Headquarters Abroad, Taking Their Capital Ownership Out Of The U.S. Tax Base And Resulting In Fewer High-Skilled Jobs. "Despite Congressional efforts to thwart corporate inversions, there are still several simple strategies for U.S. companies to reincorporate in tax-friendly jurisdictions. In recent years, numerous large U.S. corporations such as Aon, Eaton, and Ensco have moved their headquarters abroad, taking their capital ownership out of the U.S. tax base. This results not only in fewer high-skill U.S. jobs, but reduces global and national welfare as productive resources are allocated inefficiently." (Philip Dittmer, "A Global Perspective On Territorial Taxation," Tax Foundation , 8/10/12)

In The Past Decade, Forty Seven Companies Have Relocated Their Headquarters Overseas In Order To Take Advantage Of Lower Rates Through Corporate Inversions, Compared To Just 29 In The Previous Two Decades. "A new analysis found 47 companies have relocated to home bases overseas to take advantage of lower rates in the past 10 years through a merger process known as inversion. To qualify for the lower taxes, a company must do more than simply set up shop overseas and change its address. It must first merge with a company in the lower-tax country and then either do at least a quarter of its business overseas or give the owners of the foreign company at least one-fifth ownership of the newly merged company. Only 29 companies used the inversion process during the previous two decades, according to the Congressional Research Service analysis." (Gregory Wallace, "More Companies Bail On U.S. For Lower Taxes," CNN , 7/5/14)

(Gregory Wallace, "More Companies Bail On U.S. For Lower Taxes," CNN , 7/5/14)

PRESIDENT TRUMP'S TAX RELIEF ELIMINATES THE INCENTIVE FOR OFFSHORING AND INVERSIONS

President Trump's Tax Relief Would Exempt Foreign Earnings When They Are Repatriated To The United States, Removing The Incentive For Corporations To Keep Those Profits Offshore

President Trump's Proposed Tax Framework Shifts The U.S. To A Territorial Tax System. "Perhaps the most significant, yet murky, shift is the move from a worldwide tax system to a territorial tax system for multinational corporations." (Julie Hirschfeld Davis and Alan Rappeport, "Trump Proposes The Most Sweeping Tax Overhaul In Decades," The New York Times , 9/27/17)

  • A Territorial Tax System Is A Method Of Corporate Taxation That Taxes Companies Based On The Location Of Profits Rather Than Location Of Corporate Residence. "A territorial tax system taxes companies based on the location of profits rather than corporate residence. This means that U.S. companies that earn profits overseas would no longer face an additional U.S. tax on those profits when they are brought back to the United States." (Kyle Pomerleau, "Designing A Territorial Tax System: A Review Of OECD Systems," Tax Foundation , 8/1/17)

A Territorial Tax System Would Cause The Costs Of Repatriation To Fall Below The Costs Of Deferral Therefore Increasing Repatriation Significantly. "A switch to the stylized territorial system would greatly diminish the tax impediment to repatriation. To the extent the costs associated with repatriation (i.e., the residual U.S. corporate tax required) fall below the cost of deferral, an MNC will increase the amount of foreign earnings it chooses to repatriate. We find that the effective tax rate on repatriated foreign earnings under the stylized territorial system-1.75 percent-is low enough relative to the range of estimated costs of deferral to encourage U.S. MNCs to significantly increase repatriation." (Eric Drabkin, Kenneth Serwin, and Laura D'Andrea Tyson, "Implications Of A Switch To A Territorial Tax System In The United States: A Critical Comparison To The Current System," Berkeley Research Group , 11/13)

President Trump's Tax Framework Ends Incentives To Keep Foreign Earnings Offshore By Exempting Foreign Earnings If They Are Repatriated To The United States . "The framework transforms our existing 'offshoring' model to an American model. It ends the perverse incentive to keep foreign profits offshore by exempting them when they are repatriated to the United States." ("Unified Framework For Fixing Our Broken Tax Code," Committee On Ways And Means , 9/27/17)

  • President Trump's Framework Also Exempts Dividends From Foreign Subsidiaries In Which The U.S. Parent Company Owns A 10% Stake. "It will replace the existing, outdated worldwide tax system with a 100% exemption for dividends from foreign subsidiaries (in which the U.S. parent owns at least a 10% stake)." ("Unified Framework For Fixing Our Broken Tax Code," Committee On Ways And Means , 9/27/17)

With The Adoption Of A Territorial Tax System And A Decrease In The Corporate Tax Rate, There Would Be Little Incentive For Corporate Inversions

Under A Territorial Tax System, Taxation Would No Longer Be Based On Residence, So Companies Would No Longer Benefit From Corporate Inversions. "A well-designed territorial tax system would improve and address several problems with our current international tax system. Taxation would no longer be based on residence, so companies would no longer gain significant benefit from inverting." (Kyle Pomerleau, "Designing A Territorial Tax System: A Review Of OECD Systems," Tax Foundation , 8/1/17)

"The [Trump] Framework Reduces The Corporate Tax Rate To 20% - Which Is Below The 22.5% Average Of The Industrialized World." "The framework reduces the corporate tax rate to 20% - which is below the 22.5% average of the industrialized world." ("Unified Framework For Fixing Our Broken Tax Code," Committee On Ways And Means , 9/27/17)

The Flow Of U.S. Corporations' Foreign Earned Income Back To America Will Generate Investment, Increase GDP, And Create Jobs

If Companies Repatriate Their Offshore Funds, An Estimated $11 Billion Of The Funds Repatriated Annually Will Be Used For New Investment; Translating Into A $15.5 Billion Per Year GDP Increase And The Potential Creation Of 109,000 New Jobs Annually. "Based on studies of how capital-constrained firms used the funds they repatriated in response to the 2004 HIA, we estimate that at least 39 percent of the after-tax repatriations, or about $11 billion of the $28 billion repatriated annually by the capital-constrained firms, will be used for new investment.48 Using standard macroeconomic relationships between investment spending, aggregate demand, and employment, we estimate that this increase in investment spending will increase GDP by at least $15.5 billion per year and will create at least 109,000 new jobs per year." (Eric Drabkin, Kenneth Serwin, and Laura D'Andrea Tyson, "Implications Of A Switch To A Territorial Tax System In The United States: A Critical Comparison To The Current System," Berkeley Research Group , 11/13)

Dividends Repatriated From Foreign Earnings And Returned To Shareholders Will Increase Annual GDP By $6.4 Billion And Could Create About 45,000 New Jobs A Year. "In total, we estimate that the dividends repatriated from previously accumulated foreign earnings and returned to U.S. shareholders will increase annual GDP by about $6.4 billion and will create about 45,000 new jobs per year." (Eric Drabkin, Kenneth Serwin, and Laura D'Andrea Tyson, "Implications Of A Switch To A Territorial Tax System In The United States: A Critical Comparison To The Current System," Berkeley Research Group , 11/13)

In Addition, Increased Investment Spending By Repatriating Firms Will Create At Least 1.46 Million Jobs. "Overall, we conclude that the expected increase in investment spending by some repatriating firms and the expected increase in consumption spending by shareholders caused by a significant increase in the repatriation of foreign subsidiary earnings under the evaluated transition plan will have the following effects on the U.S. economy: An increase of at least $208 billion in GDP. An increase of at least 1.46 million jobs. An increase of about $80 billion in corporate tax revenues. Additional tax revenues from personal income taxes paid by shareholders on additional capital gains and dividends." (Eric Drabkin, Kenneth Serwin, and Laura D'Andrea Tyson, "Implications Of A Switch To A Territorial Tax System In The United States: A Critical Comparison To The Current System," Berkeley Research Group , 11/13)

DEMOCRATS HAVE PREVIOUSLY SAID OFFSHORING AND CORPORATE INVERSIONS NEED TO BE ADDRESSED

Even Democrats Acknowledge Offshoring And Corporate Inversions Are A Serious Issues That Must Be Addressed

In 2017, Senator Joe Donnelly (D-IN) Wrote A Letter To President Obama Explaining That The Government Must Address Companies Who Use Corporate Inversion To Avoid Tax Labilities Though Comprehensive Tax Reform. "In the letter, Donnelly wrote, 'Companies that utilize such inversions retain all the benefits of doing business in America, while avoiding the corporate tax liability of their American competitors. I regularly meet with American businesses that are committed to their local communities and to this country. Unfortunately, more than two dozen corporations in recent years have taken advantage of the current tax code to avoid taxes, thereby impeding the competitiveness of businesses that remain in the United States.' Donnelly explained that he is committed to working in a bipartisan fashion to reach a long-term solution to this problem through comprehensive corporate tax reform, but that temporary, more immediate measures are necessary in order to stop more companies from taking up this practice while Congress works on a long-term fix." ("Donnelly To President: If Congress Doesn't Act, Then A Temporary Solution Is Needed To Stop Corporate Inversions," Senator Joe Donnelly, Accessed 8/17/17)

In 2014, Senator Tim Kaine (D-VA) And 13 Other Senators Proposed A Bill To Stop Corporate Tax Inversion. "In an effort to tighten rules on corporate tax avoidance through 'inversions,' U.S. Senator Tim Kaine joined a group of 13 Senators today to introduce The Stop Corporate Inversions Act of 2014, legislation to address the practice of reincorporating offshore to avoid paying U.S. taxes." (Press Release, "Kaine Joins 13 U.S. Senators To Introduce Bill To Clamp Down On 'Inversions' Tax Loophole," United States Senator Tim Kaine , Accessed 8/16/17)

  • Senator Kaine Called The Practice Of Corporate Inversion "Flagrant Abuse" Of The Tax System And "Unacceptable." "'This is about leveling the playing field and rooting out flagrant tax abuse in our system that could lead to billions of dollars of lost revenue,' said Sen. Tim Kaine, D-Va. 'In order to fully restore budget certainty, we need to look at abuses in the tax code as much as spending. The fact that companies can change their tax liability to low-tax jurisdictions on paper while maintaining operations and ownership in the U.S. is unacceptable and I'm pleased to join my colleagues to introduce this important fix.'" (Press Release, "Kaine Joins 13 U.S. Senators To Introduce Bill To Clamp Down On 'Inversions' Tax Loophole," United States Senator Tim Kaine , Accessed 8/16/17)

Senator Chuck Schumer (D-NY) Has Backed "International Tax Reform Tied To A Large Infrastructure Program" To "Get Overseas Money To Come Back Here" Even At Lower Rate. "The two things that come, that pop to mind - because Schumer, Clinton, and Ryan have all said they support these - are immigration and some kind of international tax reform tied to a large infrastructure program. If you can get overseas money to come back here, even if it's at a lower rate than the 35 percent it now comes back at, and you can use that money for a major constructive purpose such as infrastructure - if you did an infrastructure bank, for instance, you could get $100 billion in equity in the bank and get a trillion dollars of infrastructure." (CNBC's "Speakeasy," 10/18/16)

In A Senate Hearing In 2015, Senator Claire McCaskill (D-MO) Spoke The Increasing Frequency Of Corporate Inversions Saying, "We Are Witnessing A Huge Upswing In Cross-Border Mergers And Acquisitions Activity-$1.3 Trillion In Deals In 2014 Alone." SENATOR CLAIRE MCCASKILL (D-MO): "At the same time, we are witnessing a huge upswing in cross-border mergers and acquisitions activity-$1.3 trillion in deals in 2014 alone, with foreign takeovers of U.S. companies accounting for $275 billion of that total. This is double the value of takeovers in 2013, and every expectation is that the boom will continue throughout 2015. This increasing trend merits an examination about the causes of this merger impact, and the larger impact on jobs, tax revenue and innovation." (Permanent Subcommittee On Investigations, U.S. Senate, Hearing, 6/30/15)

Territorial Tax Systems Are Common Throughout The Developed World And Many Have Called For The United States To Adopt A Version Of This System

Twenty Seven Out Of 34 OECD Member Countries Have Some Form Of Territorial Tax System. "Now, 27 of the 34 OECD member countries employ some form of territoriality, which is up from 17 just a decade ago." (Philip Dittmer, "A Global Perspective On Territorial Taxation," Tax Foundation , 8/10/12)

Many Independent U.S. Advisory Boards, Working Groups, And Federal Agencys Tasked With Exploring Tax Reform, Including President Obama's Economic Recovery Advisory Board, Has Recommended That The U.S. Move To A Territorial System . Additionally, every independent U.S. advisory board, working group, and federal agency tasked with exploring tax reform has recommended that the U.S. pivot toward a territorial system. These include President Obama's Economic Recovery Advisory Board, Council on Jobs and Competitiveness, and Commission on Fiscal Responsibility and Reform." (Philip Dittmer, "A Global Perspective On Territorial Taxation," Tax Foundation , 8/10/12)

In 2015, Senate Minority Leader Chuck Schumer Put Forth Framework For Tax Reform That Included A Shift To A Territorial Tax System. "The Senate Finance Committee, specifically, Senators Schumer (D-NY) and Portman (R-OH), put forth a framework for international tax reform in 2015. This framework would move the U.S. system to a territorial system, enact a 'patent box,' and enact anti-avoidance measures." (Alan Cole and Kyle Pomerleau, "What Do The Election Results Mean For Tax Policy?," State News Service, 11/9/16)

In 2011, The Proposal Put Forward By The Gang Of Six, Which Included Senator Dick Durbin (D-IL), And Senator Mark Warner (D-VA), Includes A Shift To A Territorial Tax System. "The Finance Committee would be instructed to deliver 'real deficit savings' through simplifying the tax code and raise as much as $1 trillion. It would do this by establishing three tax brackets with rates of 8-12 percent, 14-22 percent and 23-29 percent. It would permanently repeal the $1.7 trillion Alternative Minimum Tax. And it calls for establishing a single corporate tax rate, between 23 percent and 29 percent, and to move to a competitive territorial tax system." (Manu Raju, "Gang Of Six Back From The Brink," Politico , 7/19/11)


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