The Tax Cuts and Jobs Act was supposed to stop corporate tax dodgers. It didn't, study says.
A key selling point of the 2017 Tax Cuts and Jobs Act was that it would discourage multinational corporations from funneling billions in profits to offshore tax havens, bringing that money back to the U.S. where it could create jobs and boost economic growth. But a recent analysis concludes that the tax overhaul failed to stem the flow of corporate earnings overseas.
The study, by Javier Garcia-Bernardo and Petr Janský of Charles University in Prague and Gabriel Zucman of the University of California, Berkeley, found that the TCJA had little impact on the share of foreign income booked by U.S. companies in tax havens like Bermuda and Ireland. From 2015 to 2020 — the years before and after the law took effect — that share held steady at about 50%.
"For decades, Congress has been playing catch-up as business owners and a handful of tax havens have driven international tax policy," Zucman, a noted expert on inequality, wrote this week in a New York Times op-ed that summarized the findings.
He added, "The result has been a nation where working-class Americans are left with underfunded public schools and hospitals as the wealthy board rocketships to outer space."
The TCJA, a signature policy achievement of the Trump Administration, has had a mixed reception since its passage nearly four years ago. The law slashed corporate taxes, effectively lowering the rate on U.S. companies by 10% — a step its advocates said would boost economic growth. Although most taxpayers enjoyed some measure of tax relief under the law, corporations and wealthy individuals received much larger tax breaks than low- or middle-income families.
The issue is once again front-and-center as President Joe Biden pushes to boost business taxes as a way to fund an ambitious plan to upgrade the nation's aging roads, bridges and other infrastructure.
First of its kind
The economists said they believe that their study, which relied on tax data from the IRS as well as other government and corporate data, is the first to "empirically assess the impact of the Tax Cuts and Jobs Act" on profit-shifting by U.S. multinational businesses.
The TCJA cut the corporate tax rate from 35% to 21%, although many companies paid tax rates below 35% prior to the overhaul due to the use of common, and legal, techniques such as deductions and depreciation. At the same time, the effective tax rate on domestic profits fell 10%, the study found.
Multinational companies, which pay taxes both in the U.S. and in other countries, enjoyed a typical tax rate of about 14% in 2019, down from 19% in 2017 before the new law took effect, the researchers found.
The corporate tax debate comes as the Biden administration is working to establish a global minimum tax of at least 15%, with 130 countries and jurisdictions earlier this month signing on to an agreement that would impose such a tax on companies. The idea is to level the playing field between countries, although a few nations haven't signed on, including Ireland, which has a corporate tax rate of 12.5%.
"It won't be enough"
Zucman suggested a global minimum tax rate of 15% wouldn't go far enough.
"But even if Congress approves the 15% global minimum corporate tax, it won't be enough to close the growing economic gap between America's rich and middle class," Zucman wrote. "Taxing multinationals at 15 percent would still leave them facing a lower rate than the average American pays in state and federal income tax."
The remedy, according to Zucman, is for Congress to boost the minimum corporate tax rate to 25%, which he said would raise an additional $200 billion in annual revenue that could be used to pay for an array of government services, including free universal preschool and nationwide high-speed broadband.
Treasury Secretary Janet Yellen, meanwhile, is also pushing for a higher global minimum tax rate with members of the G20 countries, according to Reuters, although a specific rate has yet to be determined.