Profit Shifting and Offshoring, Then and Now

Transcript:Profit Shifting and Offshoring, Then and Now:
Profit Shifting and Offshoring, Then and Now Kimberly Clausing 7 May 2018 Economic Policy Institute Questions What were the incentives of the prior law? What are the problems that TCJA tries to fix? What does the TCJA do? Will it live up to promises? Are there better ways forward? Prior Law Bark v. Bite Supposed Worldwide Reach, but really a hybrid system. Statutory 35 percent rate, but effective rates far lower. Real and Imagined Problems Real Problem: Large incentive to book income abroad. Real for Some: Repatriation is discouraged. Imagined Problem: Competitiveness Problem 1: Profit Shifting Top Income Sources, U.S. Multinational Firms in 2014 Revenue Loss to U.S. Government: Over $100 billion/year Problem 2: Repatriation? Shareholders can’t get hands on $3 trillion offshore. But this doesn’t constrain firm investment. Companies can easily create the equivalent of a tax-free repatriation. This set of firms is not cash or credit constrained. Problem 3: Competitiveness Two types of companies. For internationally mobile companies, statutory rate is largely irrelevant. Our Competitive Companies: Corporate Profits as a Share of GDP, after-tax Competitiveness Problem? U.S. Share of Forbes Global 2000 Top Firms Enter the TCJA. What does it do? Huge Cut in the Corporate Stat. Rate : - $620 b/ 10 years Complex Cut in Pass-Through Tax; - $265b International Provisions (- $16 b) Territorial (- $224 b) Base Protections: GILTI (+ $112b) , BEAT (+150b) FDII (- $64) Deemed Repatriation Tax at 8 or 15.5 Percent (Raises $340 b/ 10 years) Large Deficits ($1.5 trillion + , CBO revised up) Many Sources of Uncertainty, Complexity What does the TCJA promise? What does it deliver? Less profit shifting? More investment? And, thus, wage growth? A territorial, competitive, tax system? Reform? Promise 1: Less Profit Shifting? What is the baseline? International provisions do not raise revenue. Territorial works against base protection. GILTI makes US least desirable place to book income; both low tax and high tax foreign income is preferred. Will tax directors stop doing their job if the margin is smaller? BEAT is novel but confusing. Interactions with other provisions befuddle top experts and practitioners. Are these provisions sustainable? Everyone is disappointed. Promise 2: Investment and Wage Growth? What was holding back investment? No evidence companies were cash constrained. No evidence that repatriation fuels investment or job creation. Many investments are debt-financed; these are less tax advantaged under current law than before. Excess profits important. 75%