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Weighing the Potential Consequences of Trump’s Tax Plan
Just moments after being named Donald Trump’s Treasury Secretary, Steven Mnuchin took to the airwaves of CNBC to explain that his “number one priority is tax reform.” Mincing no words, he quickly reaffirmed Trump’s campaign promise by saying: “We’re going to get to 15% and we’re going to bring a lot of cash back into the U.S.”
The comment rings true to a September 2015 Wall Street Journal op-ed penned by Trump, in which he explained:
“My plan states that any business of any size will pay no more than 15% of its business income in taxes. This low rate will make corporate inversions unnecessary and will make America one of the most competitive markets in the world. This plan will also require companies with capital offshore to bring that money back to the U.S. at a repatriation rate of only 10%. Right now, the money is not being brought back because the tax is so high.”
Steve Mnuchin, upon being confirmed as Trump’s nominee for Treasury Secretary, made it clear that tax reform will be the number one priority of the Treasury Department. Mnuchin highlighted the need for a corporate tax decrease in particular,
“We’re going to get to 15% and we’re going to bring a lot of cash back into the U.S.”
This promise is a reference is to Trump’s campaign plan to decrease the corporate tax rate from 35% to 15%*. Furthermore, this declaration made waves because another key component of Trump’s tax reform plan is a tax repatriation holiday.
US federal law stipulates that American corporations can indefinitely defer paying taxes on overseas earnings until the money is returned to the states. Therefore, many US corporations have been stashing these funds overseas to avoid paying the 35% US federal corporate tax rate, the highest in the world.**
Bloomberg currently estimates that approximately $2.6 trillion is being stashed abroad. This tax holiday would allow corporations to repatriate their earnings at a special, one-time low tax rate of 10%.
- Apple (~$215 billion, by far the most)
- Oracle Corp.
Trump has consistently stated that a “tax holiday” will successfully increase government revenue while allowing US corporations to invest repatriated funds in domestic expansion. This message of driving investment in the US was largely grounded in job growth, a key pillar of Trump’s successful presidential campaign.
The idea of using a “tax holiday” to repatriate funds stashed overseas and drive domestic growth is not untested. The Bush administration last tried a tax holiday in 2004, lowering corporate tax rates to ~5%. The one-day repatriation holiday included stipulations that the funds had to be used for hiring and research and that they could not be used for executive compensation or share buybacks.
Unfortunately, various Congressional reports and private investigations found that thousands of jobs were actually lost, companies were able to use loopholes to allocate the repatriated funds to share buybacks, & the whole holiday cost billions of dollars. The tax holiday actually led corporations to shift even more funds overseas, further eroding the tax base. There was even a push in 2009 for another tax holiday; but, the idea was shot down based on the 2004 failure and projected cost increases that would have resulted from even more profits getting moved offshore.
The 2 cents
The problem is that a repatriation tax holiday and lowering of the corporate tax rate cannot be successful as stand-alone tactics. The solution is for the US government to focus on expansive tax reform. Yes, lowering the corporate tax rate is a crucial step to keeping companies from justifiably choosing to avoid repatriating overseas profits. Switzerland (8.5%) & Ireland (12.5%) are two prime examples of nations with much more favorable corporate tax rates for firms within the highest bracket of taxable income. Also, utilizing a one-time tax holiday as a carrot to get larger corporations to play ball on tax reform is a potentially viable federal tactic. However, the Trump administration needs to hone in on simplifying the tax code and eliminating unfair tax breaks, government subsidies, lack of time limit on repatriating overseas profits & other forms of corporate welfare. Systematic lobbying by the largest corporations in important industries has taken the teeth away from the federal system of corporate taxation. Smaller American corporations get shafted because they do not have the accounting/lobbying/capital/etc. resources to circumvent the increasingly complicated tax code. Therefore, the use of a tax holiday & lowering of the corporate tax rate without wider reform would only benefit big business at the expense of the smaller American corporations, the American government, and the American people. Broad tax reform, with lower corporate tax rates & (possibly) a tax holiday as supplements, is what will drive domestic investment that increases economic activity, promotes American businesses, & drives job growth.
P.S. It was no secret that regardless of which presidential candidate emerged victorious, US multinationals were going to get a golden shower opportunity to bring back offshore funds on the cheap
*The 35% is only for the largest corporations that make over $18,333,333 & up of taxable income (WARNING: hyperlink leads to a brutal Internal Revenue Service PDF)
**When you factor in the state & local taxes, depending on where the company is incorporated, the true US corporate tax is ~39%. The only nations with higher corporate tax rates? Chad & the United Arab Emirates. In terms of “top 3s”, that’s a brutal squad to be a part of.