NOT designed to protect jobs in the United States

Earlier this week, the House Ways and Means Committee adopted his version of Of the president Rebuild a better plan. There is a lot to like about this bill: investments in families and in job-creating and climate-friendly infrastructure to the tune of $ 3.5 trillion over ten years, paid by the rich and the corporations.

But the bill misses a great opportunity: it leaves out a large part of the aptly appointed president Made in America tax plan. This plan would kill five birds with one stone, as it would:

• Finance the necessary investments;
• Eliminate current tax incentives for US offshore jobs;
• Put an end to the abuse of tax havens by multinational companies;
• End subsidies for climate-destroying fossil fuels;
• End the race to the bottom of corporate taxes (i.e. encourage other countries to increase their corporate taxes as well, thus ending the transfer of the tax burden from companies to families).

The key to doing all of this is targeting foreigner profits of multinational companies.

Instead, the ways and means bill puts the tax burden directly on domestic businesses.

Ways and means tax provisions vs President’s proposal

The corporate tax rate would drop from 21% to 26.5%. It is not as much as the President’s request (28%), but it is still important, the compensation 540 billion dollars more than ten years. (The rate was 35% before the Trump administration gave the rich a big tax cut in 2017.) Unincorporated business owners – but only those who earn more than $ 400,000 a year according to the president’s red line – will also contribute through a series of changes to other business taxes and personal income tax.

In contrast, foreign profits of US multinational corporations will continue to be taxed at a reduced rate, which will remain virtually unchanged at around 16.5%. (plus foreign taxes in countries with higher rates than that). * As the national rate will drop from 21% to 26.5%, the the spread between foreign and domestic rates will increase, who increases incentives for US multinationals to relocate jobs and abuse tax havens.

The president wants to increase the foreign rate to 21%, and it would be even better to equalize foreign and domestic rates.

While the President’s plan would also eliminate another tax break (known as FDII), the Ways and Means plan would only reduce it. This tax break benefits US exporters, to the detriment of businesses serving the domestic market (like most utilities, telecommunications, or healthcare companies, for example).

It aims to partially offset the incentive to abuse tax havens created by the reduced foreign rate: the idea is to grant tax relief to American multinationals for their export-oriented domestic production in order to encourage them to serve overseas markets by exporting from the United States. States rather than establishing operations abroad. But it is actually unrelated to actual transactions and can be abused through paper transactions. It discriminates against producers for the domestic market and probably violates international law. It belongs on the chopping block.

All in all, Ways and Means have proposed reforms to the tax on foreign profits and the FDII would bring in a meager $ 120 billion more than ten years, unlike $ 916 billion in the president’s plan – and hardly anything beyond ten years.

It is the result of a large business lobbying campaign. They managed to scare lawmakers into believing that the president’s plan would hurt their competitiveness.

One need only look at the New York Stock Exchange to realize that American multinationals do not suffer from a competitiveness problem despite the fact that other countries have taxed foreign profits even less than the United States for decades.

This fear is all the more misplaced as the Administration is finalizing an international agreement to institute a global minimum tax, which would increase the taxes of foreign competitors. Foreign multinationals generally pay 0% tax to their home country on their overseas operations. The nascent agreement would bring this figure to “at least 15%”.

The final touches should be made by the first week of October, for a public agreement by the G20 heads of state on October 30 and 31. (While this deal is good for the United States, Oxfam is concerned that it not so good for developing countries.)

The Ways and Means Bill takes stock of this impending international agreement. The Committee has chosen to meet the strict minimum international standard. In a regard where the international standard is better – the application of the foreign income tax country by country – Ways and Means improves current US law to conform to the international standard (presumably under foreign pressure). In all other respects, where the existing US law is stronger than the international standard, the ways and means bill lowers U.S. law to the minimum global standard.

In contrast, the president’s plan would also apply the tax country by country, while preserving the strongest elements of US law.

On the bright side, the Ways and Means Bill removes the tax break for foreign oil and gas extraction, which is currently fully exempt from foreign profit tax. This raises another 106 billion dollars more than ten years. The big oil companies are pushing hard to preserve this tax break in the final bill, but foreign countries are unlikely to agree that US oil and gas companies are the only companies in the world to be exempt from a minimum tax.

Besides, the bill does not repeal national fossil fuel subsidies–A great missed opportunity to slow climate change and generate additional income.

Combining all these changes with the increased gap between domestic and foreign rates, it is not clear that the ways and means would really reduce the abuses of tax havens.

American multinationals for victory

Considering both the Ways and Means Bill and the international agreement, American multinationals are clearly the winners: they hardly pay any more taxes on their operations abroad, while their foreign competitors see their taxes increase significantly because of the global minimum tax.

In isolation, that would be a good thing (even if unnecessary). But this comes at a cost: national companies, and investments in the United States more generally, whether they are purely national companies, American multinationals or foreign multinationals, alone pay for the Build Back Better plan. This will to invest in America relatively more expensive than to invest abroad, hurting American jobs.

One way of looking at it is this: Seven in ten American workers work for purely national (or government or nonprofit) companies. Two in ten work for an American multinational. One in ten works for a foreign multinational. National investments to hire all these workers would be taxed at the rate of 26.5%. The discount rate on foreign profits will create jobs mainly abroad.

Multinational lobbyists argue that foreign employment spills over into US employment. For example, when an American multinational opens an overseas manufacturing facility, it usually increases research and development and back office jobs in America as well. It may be true. But this only concerns a very small part of the American economy: only a small fraction of the two in ten American jobs created by American multinational companies (the largest fraction being operational jobs serving the American market, and not jobs overflowing with activities abroad).

Where to go from here? The best solution is to go back to the drawing board and adopt the president’s plan, for large portions including the legislative text exists. A stopgap solution would be to keep the text of the ways and means, but dramatically increase the 5/8 ratio of foreign tax rates to domestic tax rates, eliminate FDII completely, and repeal domestic fossil fuel subsidies. These changes would generate substantial revenue that Congress could use to address unmet priorities.

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* For connoisseurs: The so-called GILTI rate is now 10.5% but, under current law, it should rise to 13.125% after 2025 (or 5/8 of the current rate of 21% of companies). However, due to the partial (80%) and global mixture of foreign tax credits, the minimum effective tax rate that most US multinational corporations will face on their foreign profits will be 16.4% after 2025 (13,125 % divided by 80%). The Ways and Means Bill does not change the ratio of 5/8, but advances to 2022 instead of 2026. Because it raises the corporate rate to 26.5%, the GILTI rate will automatically change to 16.6% (5/8 of 26.5%). And because the Ways and Means Bill grants credits for 95% of foreign taxes and applies them country by country, that will be the minimum effective tax rate that most US multinational corporations will face on their foreign profits.