President Trump kicks off a big push for tax reform in Missouri on Wednesday, bringing renewed focus to one of the key political battles shaping up this fall. Virtually everyone in Washington agrees that the U.S. tax code, which hasn’t been rewritten in over 30 years, needs a significant overhaul. The question, as always, is what those changes look like and what kind of reform is feasible politically.
Patricia Cohen of The New York Times reminds us why tax reform will not be easy, and highlights some of the many pitfalls that line the path. Repatriation of foreign profits -- roughly $2.6 trillion in corporate profits is being held offshore -- is an especially thorny issue.
Some key points you’ll likely see again and again as the debate heats up:
- Repatriation would help shareholders more than workers: Less than a quarter of companies would reinvest funds brought back to the U.S., according to survey data. Most would simply further enrich shareholders through dividends and buybacks. When President George W. Bush temporarily lowered taxes on foreign profits in 2004, more than $300 billion came back the U.S., but most of it ended up in investors’ pockets.
- The money isn’t really offshore: Much of what we think of as earnings “trapped” offshore is really just an accounting gimmick. And the earnings that are assigned to offshore entities can be enormously beneficial to companies, since firms can borrow against them and deduct the interest payments.
- A territorial tax system is still open to abuse: Although there may be benefits to changing the way foreign profits are taxed, there is no guarantee that tax dodging will be reduced. “It’s an endless cat-and-mouse game” that leaves countries racing to lower their business tax rates to zero, Matthew Gardner of the Institute on Taxation and Economic Policy tells Cohen. That’s simply unsustainable, economists argue.
More generally, there are plenty of questions about the value of cutting corporate taxes, especially given current economic conditions:
- There’s little evidence that cutting corporate taxes boosts investment: This is an endless point of contention, but the Republican faith in the power of tax cuts to boost the economy has many doubters. As William G. Gale of the Urban-Brookings Tax Policy Center said in an earlier Cohen piece, “The assumed effects on growth are just huge and unwarranted.”
- Corporate profits are already high: As a share of GDP, corporate profits are at multi-decade highs. And the Treasury Department says profits for some large international firms are above their historical averages. It’s not at all clear why further boosting those profits would benefit the broader economy.
The bottom line is that while the U.S. tax system may be in dire need of renovation, encouraging companies to repatriate foreign profits won’t necessarily bring the promised benefits to a broader swath of the American public.