Where is the money going?
Devin Smioth at New Economic Perspective points us to ‘where does the money go?”:
After President Trump signed the GOP tax plan into law, some of the bill’s corporate beneficiaries have offered workers minor bonuses. But NEP’s Bill Black says they’re keeping most of the money for themselves — and starting a new global race to the bottom for corporate taxes. You can view here with a transcript.
One thing in particular caught my attention in the new Tax Bill:
“Enact a deemed repatriation of foreign-source income at a rate of 15.5% for liquid assets and 8% for illiquid assets.”
Present tax law redeems foreign source income repatriation at prseent corporate tax rates. But this income is after foreign taxes have been paid from foreign income to foreign gov’ts. Those are mostly lower than the U.S. tax rate however.
The effect is to incentivize domestic capital owners to invest offshore and then wait until congress enacts a lower redemption rate on foreign earned income to repatriate it Meanwhile it also incentivizes them to use those foreign net income not repatriated to increase investments in foreign nations rather than in the U.S.
Under the New tax bill as I understand the new provisions for redeemed foreign earned income repatriated, the tax is now even lower than on the new corporate tax rates…. 15% instead of 21% which is instead of the corporate rates not in effect (through 2017).
It seems to me therefore that this will incentivize a new and much greater increase of foreign investment by domestic capital owners
And its an even greater reduction in taxes for if the foreign earned income is in the form of illiquid assets…. 8% instead of 15%. & this is compared to domestic corporate taxes in the new tax bill of 21%.
So why wouldn’t domestic capital owners now prioritize capital investments to offshore enterprises even more than they have ever done before and thus reduce relative investments in domestic enterprises?
In fact it then becomes even more lucrative to reinvest all their foreign earned income after taxes but before repatriation in foreign enterprises since the after tax profits after accounting for the 15% tax on foreign earned income (or 8% depending on the foreign earned asset type) still show up as domestic profits after tax on public company quarterly and annual reports… thus also elevate equity values more.
Occasionally (say every 5 years or so as example) they can repatriate a fraction of cumulative foreign earned income after taxes to pay out as dividends to investors and do so at an even more profitable rate than for domestic after tax profits.
Seems to me to dramatically increase the profit incentives for domestic capital owners to invest more offshore and less domestically than ever before..
I can already guess one of the comments will be that the sum of foreign taxes and repatriated 15% tax will be larger than domestic profits tax of 21% and so will disincentivize foreign investment by domestic capital owners, rather than incentive it more.
But that assumes foreign gov’ts won’t compete by reducing their own tax rate on foreign investments in their nations. History tells us otherwise though. So the foreign gov’t tax rates will drop (by increasing incentives or reducing their tax rates on foreign investors or some combination).
This then also produces a counter effect of further demands to reduce foreign earned income in the US as well as US domestic taxes on corporations. A race to the bottom for corporate sources of tax revenues. Not a pleasant result for non-capital owners.
I would retitle the post’s title as:
“Where is the money going to go?”