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Trump and Biden ‘Made in America’ tax plans ignore the real problem

September 15, 2020

Smaller U.S. companies continue to pay a higher effective tax rate, stunting their growth and encouraging more offshoring by large multinationals

The presidential election campaign is in high gear and both Donald Trump and Joe Biden are busy making their case to the American people. And clearly the economic toll of the COVID-19 pandemic has influenced their thinking, since both are now talking about reshoring important industries, particularly from China. 

[David Morse | September 11, 2020 | MarketWatch]

Both Trump and Biden are taking aim at offshoring and China trade. Trump has already presented a “Fighting for you” agenda that aims to bring manufacturing jobs back from China. And Biden is proposing a 10% “Made in America” tax credit for companies that create U.S. jobs. These proposals will likely appeal to voters.

But neither candidate is addressing a far greater problem—that large, foreign multinational corporations continually shift massive profits to overseas tax havens. Trump’s plan simply doesn’t address this profit shifting by the world’s largest corporations. And Biden’s plan focuses only on U.S. companies.

That means both candidates are leaving in place plenty of incentives for further offshoring.

Here’s something to consider. More than 80% of U.S. employment is supported by smaller businesses. It’s these smaller, domestic companies that Trump and Biden should focus on, particularly in the quest to bring back domestic manufacturing. But that’s unlikely to happen as long as large multinationals continue to enjoy a huge tax advantage.

Reading through the candidates’ proposals, it’s clear that both have spent a lot of time focused on corporate tax rates. But they’ve hardly delved into the large disparity in tax rates being paid by different companies.

Yes, the Trump plan wants to bring 1 million manufacturing jobs back from China. But there’s not a word in Trump’s proposals regarding the corporate tax avoidance of profit shifting. And while the Biden plan would impose offshoring penalties on U.S. companies, it does nothing about foreign companies that sell in the U.S. market and then avoid U.S. taxes.

Essentially, both plans fail to fully address this problem: Domestic U.S. companies keep paying corporate taxes on U.S. sales and their overseas competitors don’t. That means plenty of large multinationals—both domestic and foreign—keep parking record profits in tax-haven nations. 

The only way to change this is to start denying multinationals the benefits of such massive profit shifting. And currently, there’s a stark difference in the real corporate tax rate faced by profit-shifting firms compared with domestic American companies. Literally dozens of Fortune 500 firms consistently pay little or no U.S. corporate taxes. At the same time, domestic companies are paying a far higher effective tax rate. That leaves multinationals able to reinvest profits and keep undercutting U.S. firms.

The 2020 campaign presents a pivotal moment, and both Trump and Biden should consider a “destination-based” corporate tax system. Instead of the complicated world of the 2017 Tax Cuts and Jobs Act, it’s time for the United States to move to a far simpler territorial tax that would ensure multinational firms—both foreign and domestic—start paying the same effective corporate tax rate as domestic companies on U.S. profits.

Unless Trump and Biden propose real, fundamental reform, not much will change in the battle to help domestic companies better compete with China and other countries. And that means Trump and Biden must shake off the naive assumption that all corporations pay the same tax rate. They’re not. And it’s America’s smaller domestic companies that keep getting the shaft. 

The simplest way to fix this is to impose real tax fairness. And so, whether or not companies bring production back from China, they should all face an equal corporate tax rate. Leveling the tax field will help America’s domestic companies become more competitive, and that’s what truly spurs practical, long-term job creation here at home.

David Morse is tax policy director at the Coalition for a Prosperous America Education Fund. Follow him at @CentristinIdaho

Read the original op-ed here.

Tax op-ed

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  • Mark Sanguinetti
    Multi-national companies bringing in revenue from the U.S. markets now are also allowed to offshore their U.S. sales to tax havens, as one example in the Cayman Islands, to avoid U.S. corporate taxes. The corporate tax is from the income from entities registered as corporations and not as individuals. The avoidance of U.S. corporate tax is done through a company setting up an offshore in Cayman Islands subsidiary company, which is owned by the parent company. Offshore banking is then used with sales directed through the subsidiary company rather than through the in U.S.A. parent company. They generate sales in the U.S. and then send it to the Cayman Islands to avoid U.S. taxes with less revenue for the U.S. federal government. Instead a much smaller Cayman Islands tax. Tax havens should not be legalized in the USA.