Friday, 14 Dec 2018

Does the GOP tax law encourage outsourcing?

A banner representing the Chevrolet Cruze vehicle model is on display at the General Motors plant last month in Lordstown, Ohio. (AP Photo / John Minchillo)

General Motors » The decision made last week to stop the production of five factories in North America and lay off 15% of its employees sparked a partisan debate over whether the Republican tax law passed in the fall last encourages companies to send their jobs overseas.

Senator Sherrod Brown (D-Ohio), widely regarded as a presidential candidate in 2020, said on Twitter that "no one in Washington should be surprised" that GOP tax law encourages the outsourcing of General Motors. Congressional Republicans vehemently denied the allegation and said nothing in their legislation favored the transfer of jobs abroad.

"It's a purely partisan attack to blame GM's decision on the new tax law," said Nicole Hager, spokeswoman for Sen. Orrin G. Hatch (R-Utah), one of the leading architects of the law. "We are already seeing tax reform on the move: Multinational companies are bringing home jobs and investments."

The automaker's announcement may not be surprising, but it is part of a broad debate among economists, academics, and tax experts about the extent to which President Trump's tax law encourages businesses more broadly. to outsource.

Most experts said that it was impossible to know exactly what motivated the dismissals of General Motors without a direct knowledge of the motives of the company, noting that a large number of factors had probably been taken into account in the decision. .

GM executives said the changes reflected their desire to focus on autonomous cars, electric vehicles and more efficient trucks, crossovers and SUVs. The New York Times noted that the downsizing comes in the wake of declining consumer interest in small and medium-sized cars. A spokeswoman for the company did not respond to a request for comment on the impact of the GOP tax law on GM's decision.

The Republican Tax Law of 2017 has transformed the way the US tax code applies to multinational corporations and their subsidiaries, significantly reducing the tax burden of businesses on their domestic and foreign revenues. For conservative economists, and even some liberals opposed to the law as a whole, these changes have actually reduced incentives to outsource.

These experts argue that the status quo before the tax recast included its own incentives for outsourcing and noted that the law had lowered the US corporate tax rate from 35% to 21% – which should encourage more, and no less, the national investment.

But other left-wing economists and some non-partisan economists defended Brown's assertion, pointing out that the law significantly reduced the amount of US taxes paid by multinational corporations on their foreign affiliates. For these experts, Republican tax law has created a significant new incentive to relocate by lowering the taxable income of companies with more assets abroad. These critics also pointed out that the law created a new tax rate on foreign income, which covered only half of these companies' foreign income, but half of that paid in the domestic market – a "50 percent coupon". %, As Brown called it.

The debate has great implications for both US policy and the global economy, as companies try to assess the impact of the nearly one-year GOP law on their overall financial incentives. after the tax experts.

Before the tax law, the profits of American corporations abroad were, at least in theory, taxed at 35%, the same national tax rate. This practice of applying the same tax on domestic and international income is called a "global tax system".

The Conservatives argued that this structure encouraged American companies to move their headquarters abroad, as many other developed countries do not impose double taxation on their domestic and foreign revenues. They also said that this has led many companies to postpone indefinitely the return of their earnings in their country, since they could avoid double taxation by keeping their money outside the United States.

"There are many legitimate criticisms of tax law, but I do not think the general view, even among Democrats, is to strengthen firms' overall incentives to relocate," said Alan Auerbach, an economist with # 39; university. from California-Berkeley specializing in tax matters.

The GOP tax law has converted America into a "territorial tax system," which exempts most corporate tax revenues from US taxes. But the new system is also criticized for promoting subcontracting.

In 2014, the average rate paid by US companies to these foreign countries where they operated between 10.5% and 15%, which is less than the US corporate tax rate of 21%, said Stephen Shay, former head of tax at the UK Treasury Department, who currently teaches Harvard. This means that for US companies, profits on domestic profits are taxed at a much higher rate than those on foreign profits – which, according to the critics, is an obvious incentive to outsource.

The GOP tax law also included a new, complicated rule to prevent businesses from playing with the new system in order to reduce taxes. This new rule includes a provision stating that corporations may escape corporate income tax in the United States if their foreign exchange earnings are less than 10% of their "tangible" foreign assets. This provision is intended to prevent companies from artificially transferring their money abroad. But skeptics say it could backfire, as companies reduce their taxable income by increasing the production they produce outside the United States. In other words, critics say it's a direct financial incentive to outsource.

"These multinationals will want to stay below the 10% threshold, because that means the US tax system will not affect their foreign revenues," said Matt Gardner, tax expert at the Institute of Taxation and Economic Policy. , a left-think group. "If you move an entire plant overseas, it dramatically increases what they can earn without paying US taxes."

Shay, the former Treasury official, said that Brown might underestimate how much GOP tax law encourages businesses to outsource. US companies have proven very effective in preventing foreign countries from raising taxes on their subsidiaries, Shay said.

However, other economists have pointed out that it is hard to imagine that these new incentives already explain the behavior of companies like GM's. The Internal Revenue Service and the Treasury Department, for example, still determine the exact parameters of international tax law provisions. Ernie Tedeschi, a former economist in President Barack Obama's Treasury Department, said the other economic policies of the Trump administration, such as the imposition of tariffs, would likely have affected GM's decision.

"If GM's decision had anything to do with US tax policy, it was much more likely that it was the rates that were influencing it," Tedeschi said.


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