As Trump Rolls On, Fixing Tax Loopholes Is a Clear Priority
Last night, in his victory speech after another slew of Republican primary wins on Super Tuesday, Donald Trump decided to return to one of his recurring themes for American business: repatriation and tax inversions.
If elected, Trump told his supporters, "Apple and all of these great companies will be making their products in the United States, not in China." Also, when it comes to preventing companies from moving overseas to dodge high domestic corporate taxes, Trump crowed, "You could make a deal on that in 10 minutes if you knew what you're doing."
It's a classic populist theme. Our greatest American brands have, for years, been pushed to move overseas, to escape onerous regulation and punishing taxation. That diminishes America on the world stage, and, if you want to Make America Great Again, you have get serious about lowering taxes and limiting the incentive for companies to buy overseas rivals simply to move to tax-friendlier nations.
What is different about the current debate is that it used to be framed around domestic jobs moving overseas. When a company closed a factory in Kansas City and moved it to Mexico, real Americans lost real jobs, increasing unemployment and hurting our domestic economy.
Now, the debate isn't so concerned with people as much as capital. Jobs come and go, and America's entrepreneurial capitalist system has allowed for people to replace manufacturing jobs with roles at smaller businesses and given opportunities to even create businesses themselves. Even U.S. manufacturing has shown signs of recovery after hitting a low last year. It may not be politically popular to say, but jobs aren't really the problem here. Nor, with apologies to those Feeling the Bern, is the problem one of outsized corporate profits.
Rather, the issue is inefficient and onerous corporate taxation, and Trump seems alone now in making that a key part of his improbable, and likely unstoppable, run for the GOP nomination.
There is an estimated $2.5 trillion in profits held by U.S. companies in foreign subsidiaries. Technically, under our tax system, American corporations owe tax payments on all the money they make, no matter where. But there's a catch. Our IRS can't touch that money until a company repatriates, or brings it back to the U.S. to use. Rather than do that, companies have been reinvesting it locally instead, or using it in countries with much lower corporate tax rates than their own.
That may seem like "greedy" capitalism to some, but it's actually basic economics. Capital exists for reinvestment in some way. If you could guarantee a rate of return that was higher than the tax rate you would be paying on that profit, it would be a simple matter to bring your overseas profits back home and invest in the good ol' U.S. of A. But, with a federal corporate tax rate of 20 percent, and close to 40 percent when state taxation is applied, companies actually lose their ability to effectively reinvest that capital in innovation, research, equipment and -- yes -- jobs, so they don't even bother.
It has a huge impact on tax receipts. If the estimates of $2.5 trillion in overseas profit are accurate, U.S. companies would owe $620 billion in corporate taxes.
More importantly, though, that money represents a kind of economic stimulus that is hard to duplicate. In theory, if companies bring that money back, they could manufacture here (hence the mention of Apple, which, despite being a darling of the political left, is the country's worst offender for keeping profits offshore, to the tune of $200 billion). They would also not be looking to up and move offshore. Companies like Burger King and Medtronic have already acquired overseas companies and re-domiciled in low-tax countries. Trump often mentions the move of Pfizer, which was founded in Brooklyn but plans to be based in Ireland.
Trump wants to keep these companies -- and their capital -- American through a simple tax reduction. Trump has proposed a one-time 10 percent tax on foreign profits, paid whether the companies repatriate that cash or not. After that, companies would have to pay the standard corporate-tax rate (which he plans to reduce to 15 percent) on all profits, no matter where the company is based, ending the ability to defer. To avoid these companies being taxed twice, corporations could still claim a credit for the taxes they pay overseas.
As with everything any candidate says on the hustings, it isn't quite so simple. While the accounting might work, the impact on our economy is less certain. For instance, it isn't just the American tax burden that has made companies move overseas. In many cases, these are global businesses that need to operate globally, in local markets and those jobs and capital will never come back. Give Apple a one-time deferral of all the taxes it owes anywhere in the world and it's unlikely it will shutter its Chinese manufacturing operations. It simply has too much invested there, and the quality of the product is too sound to risk moving anywhere, including the U.S. Many entrepreneurs -- probably dreaming of the day when they have repatriation problems of their own -- weigh the pros and cons of manufacturing in places like China, and find it the best option, for a range a reasons that have nothing to do with the IRS.
In fact, many U.S. multinational corporations don't view their operations overseas as an escape from the United States as much as an export of America's exceptional engineering and management skills to the rest of the world. It is beachhead for entrepreneurial capitalism, often in places (like Ireland, for instance) that are still shaking off the remnants and scars of their own brand of socialism. American involvement in many of these countries creates markets for American products and services. Companies would never want to change that. No U.S. citizen should want to, because that helps drive our own economic growth.
But Trump is correct that there needs to be more of a focus on bringing some of these profits back home for reinvestment, and he's also right in understanding that you can't ban U.S. companies from moving offshore, only fix the perverse tax incentives that exist that drive them to make the move.
It may take more than a 10-minute conversation (alacrity tops even integrity in the qualities Congress lacks most), but Trump's very high-profile support of this issue -- so important to American business -- seems a good first step.
Ray Hennessey is the former editorial director of Entrepreneur.