On Tax Day 2019, the first year of data on corporate taxes under the Tax Cuts and Jobs Act (TCJA) are coming in. Those who championed the corporate reforms promised, among other benefits, that the changes would end the offshore shell games by multinationals, profits stashed in tax havens would return to the U.S., and the new competitive rate would attract a flood of foreign direct investment.
Opponents of the new law, like the FACT Coalition and our members, argued that the incentives would have the opposite effect: the offshoring of profits would continue and the incentives might well create new (unhelpful) distortions influencing corporate behavior.
It is now time to look at what actually happened. To get a better sense of the impact, consider the following recent excerpts from various news reports and analysis by tax experts.
From The Wall Street Journal:
“It’s kind of dawning on everybody at about the same time that [incentives in the TCJA are] going to be an issue,” Jon Moeller, [Procter & Gamble’s] chief financial officer, said in an interview. “On the margin, it disincents local job creation.”
“The primary area is really the US multinational companies who avoid or minimize their US tax by moving their profits around the world,” Jeffrey Gottlieb, an accounting and finance instructor at the University of North Florida and 35-year veteran of industrial tax strategies, told Fortune. By shifting income geographically and choosing to house it in low-tax areas, a multinational can minimize the U.S. taxes it pays.
New taxes that came into effect in 2018 were supposed to stop the juggling, but at most it only made a dent. “The game is still being played in a big way,” Gottlieb said.
On [March 27, 2019], the U.S. Bureau of Economic Analysis published the numbers on cross-border financial transactions from the fourth quarter of 2018. There is now a full year of data to assess [presidential advisor Stephen] Moore’s claims [that the TCJA would “stop foreigners from eating our lunch and stealing our jobs” by making the U.S. more attractive as an investment destination]. These data […] show the new tax regime continues to encourage U.S. companies to avoid tax by channeling their profits through tax havens. Worse, it actively encourages them to increase their physical presence abroad at the expense of domestic investment in plant and equipment to avoid U.S. taxes—the exact opposite of what was advertised.
The Barron’s article goes on to note that only a small fraction — 6% — of the offshore cash has been brought back to the U.S. and that foreign direct investment in America, a promised increase was a major selling point during the debate over the tax law, has actually gone down when compared to the three years prior to enactment of the TCJA.
The Institute on Taxation and Economic Policy (ITEP), a FACT Coalition member, just released a report called “Corporate Tax Avoidance Remains Rampant Under New Tax Law.” The report highlights 60 profitable Fortune 500 companies across multiple industrial sectors that paid nothing in federal income taxes in 2018. ITEP explains that any number of loopholes could be responsible for the tax avoidance, but:
“None of these disclosures are sufficiently clear to allow analysts, policymakers or the public to understand which features of the tax law are responsible for these companies’ tax avoidance.”
The early returns are in and the data suggest that the law did not deliver on its promises — corporate tax dodging remains high with little to no evidence of benefits from increased foreign investment or a return of the foreign profits of U.S. multinational companies.
While more information is needed to fully assess the problems, we do know enough to take some basic steps. Proposals like the No Tax Breaks for Outsourcing Act (H.R.1711/S.780) and the Stop Tax Haven Abuse Act (H.R.1712/S.779), sponsored by Representative Lloyd Doggett (D-TX) and Senator Sheldon Whitehouse (D-RI), are both excellent places to start. We should also require that companies that operate in multiple countries and continue to shift profits offshore be more transparent in their disclosures; they should have to publicly report on what they are doing on a country-by-country basis.
On this, the first Tax Day under the new law, we can already see the failures of the TCJA. But we also do not want to simply go back to the previously flawed corporate tax system. We must start working now to develop the necessary changes to move us toward a tax system that effectively addresses the challenges of a global economy. Given what we once predicted, and can now confirm, the new tax law doesn’t do it.
Gary Kalman, is the Executive Director of The FACT Coalition.