While global markets reel from the impacts of the President’s sweeping tariffs, many lawmakers and investors have reacted with disbelief and outrage at the scale and scope of the new levies. The Administration insists that, however bad any “transition period” following the imposition of tariffs may be, it is a small price to pay to revive U.S. domestic manufacturing and jobs.

Whether or not the tariffs are ultimately effective, they are meant to react to a very real problem: the decades-long collapse of what was once a dynamic U.S. manufacturing base. As the largest U.S. companies – invariably multinational corporations – have grown since the turn of the century, they have increasingly shifted production overseas in search of cheaper labor and, crucially, bigger tax breaks. 

Rather than discouraging offshoring, our tax code has for decades rewarded it. With major tax reform on the horizon this year, Congress has a generational opportunity to fix these perverse tax incentives once and for all.

The 2017 Tax Reform: One Step Forward, One Step Back

The signature legislative achievement of the first Trump Administration was the 2017 tax law, which, among many other changes, dramatically reshaped how the U.S. taxes the foreign profits of domestic multinational corporations. 

Before 2017, the profits that U.S. multinationals earned abroad – whether through foreign production or strictly “on paper” accounting gimmicks meant to avoid taxes – were not taxed by the U.S. until they were returned onshore. Under this deferral system, companies had a clear incentive to book and keep their profits abroad rather than invest in domestic operations and job creation. This system also drained revenue, as companies were able to delay their U.S. tax liability indefinitely in some cases, leaving the U.S. to rely on repatriation tax holidays and other gimmicks to subject these offshored profits to any level of domestic taxation at all. 

The 2017 tax reform was a major improvement on this inefficient and unfair international tax system, replacing taxation upon repatriation with a groundbreaking new minimum tax on almost all foreign profits of American companies, due immediately in the same year, called the Global Intangible Low-Taxed Income (GILTI) regime. While this new policy sought to cut down on multinational tax avoidance, however, it also introduced brand new incentives for offshoring.

A Tax Break for Foreign Factories

When it comes to promoting and protecting U.S. manufacturing, GILTI’s first failure was that it was only intended to target profits derived from intangible assets like patents and copyrights, given that such assets are especially easy to move across borders and play international tax games with. 

As such, GILTI provides a flat percentage discount to firms based on the value of their tangible assets like factories and equipment in foreign jurisdictions. Such foreign investments don’t even have to be profitable – merely building factories anywhere outside the United States is enough to lower their U.S. tax bills. The problem here is obvious: the more that American companies invest in jobs and production abroad, the bigger their U.S. tax break.

No surprise, then, that plenty of companies choose to manufacture their products abroad, even when they plan to sell those products to American consumers. Big pharma companies, in particular, regularly pay no U.S. tax – often even booking a tax loss in the U.S. – despite making the vast majority of their sales to American patients, who pay some of the highest prices for lifesaving drugs in the world. Because many of these companies largely produce outside of the United States (or in Puerto Rico, which is considered to be a foreign jurisdiction for tax purposes), they get a big discount on GILTI due to their heavy investment in foreign production facilities. Under the 2017 law, they have no incentive to re-shore the production of drugs that are largely intended for the U.S. market.

A Half-Off Tax Break for Profits “Anywhere But Here”

Another problem with the 2017 tax reform is that it established a substantially lower tax rate for foreign income, with GILTI taxable at just half the rate that would apply if the income were domestic.

You’re not reading that wrong. The tax rate that U.S. multinationals – some of the largest and most successful companies in the world – pay on their foreign profits is half what they would pay at home. 

This is, very clearly, an America-last tax policy: one that actively discourages companies from investing in manufacturing capacity within our borders. To encourage domestic manufacturing – as the Trump Administration’s tariffs seemingly aim to do – American corporations should not be given a lower tax rate for their foreign profits than those they earn at home. 

Once again, pharmaceutical companies provide a perfect example of how these perverse incentives leave ordinary Americans on the hook. Instead of producing drugs meant for the domestic market here at home, many pharma companies move production to notorious tax havens like Puerto Rico, Switzerland, Singapore, and (as President Trump recently noted) Ireland, only to sell those products back to Americans at an extortionary markup – a practice euphemistically called “roundtripping” – all while getting a half-off tax discount for producing offshore. 

The Obvious Solution, and Opportunity, in 2025

The American people know that these policies are wrong. Recent polling by conservative firm McLaughlin and Associates shows that 87 percent of likely voters agree that “the U.S. tax code should support U.S. manufacturing and jobs, rather than rewarding big American companies that ship operations overseas.” Luckily, the scheduled expiration of much of the 2017 tax reform at the end of this year presents lawmakers with a perfect opportunity to end offshoring incentives in our tax code.

The half-off GILTI discount is already scheduled to get smaller at the end of 2025. Rather than extending the current generous discount, as certain special interests are demanding, Congress should eliminate it altogether and close the gap between the tax rates on foreign and domestic corporate income. Anything less would undercut the Administration’s stated interest in reviving domestic manufacturing by keeping a thumb on the scale for corporate offshoring. 

These reforms are not only good policy – promoting U.S. manufacturing and jobs, raising substantial revenue to pay for shared priorities, and providing a fair playing field for smaller domestic businesses – they’re also common sense. Corporate profits cannot be the end-all-be-all of tax policy: America’s long-run prosperity depends on a strong economy powered by good-paying domestic jobs, and our tax code should support that goal. As Congress considers its tax reform package this year, they have an opportunity to prove their commitment to truly putting America first.