Republican Tax Cuts May Actually Accelerate Flow of Jobs Overseas

The new tax cuts President Trump and the GOP have been trumpeting were in part designed – or at least the public was told –  they would make America great again by encouraging companies to bring back manufacturing jobs to cities and towns across the country.

But even before the Tax Cut and Jobs Act (TCJA) become law, critics said the way it was drafted could actually encourage businesses to send more jobs abroad.

We heard time and again that the previous U.S. corporate tax rate was 35 percent, much higher than what companies pay in most industrialized countries. That argument, however, becomes complicated once one drifts into the weeds of U.S. tax policy. For companies with overseas operations, that 35 percent rate only applied when profits generated by U.S. firms’ foreign subsidiaries were repatriated, such as in the form of a dividend. Companies simply had ducked that high rate by postponing those dividends again and again – which is one reason most estimates suggested companies over the years had socked away close to $3 trillion in cash overseas.

As House and Senate leaders moved along their versions of the tax cut bill through Capitol Hill, the response of congressional Republicans became clear: revamp how corporations were taxed on foreign income. GOP leaders settled on a territorial approach, i.e., one that would not apply a universal tax rate on what American firms would earn on foreign soil. “Unfortunately, the bills’ approach could still encourage production and profits to be shifted abroad,” wrote Steven Rosenthal for the non-partisan Tax Policy Center as the bill was taking shape in Congress.

Ultimately, the law imposed a tax on overseas subsidiaries of 10.5 percent, which is half the rate, 21 percent, taxed on income generated on U.S. soil. Companies will score a credit for up to 80 percent of taxes paid to foreign countries, but if that amount is less than 10.5 percent of any income earned abroad, firms then owe the U.S. federal government a tax bill.

Therein lies the problem. There is little incentive for companies to invest in manufacturing in the U.S. if they will be taxed up to twice amount on those profits generated here as they would pay on goods made in overseas factories.

For a small company making a specialized product requiring highly skilled labor, it is doubtful this new tax law would encourage those companies to quickly flee U.S. shores. After all, there are risks moving abroad, including political instability, corruption, logistics and the costs of construction and training workers in a foreign country. Big companies can take those risks; your smaller outfits cannot.

Nevertheless, for high-value items such as automobiles, that difference in tax rates could persuade those companies to invest in factories outside the U.S.

Furthermore, as Rosenthal pointed out, tangible returns, which apply to investments such as factory equipment, would not be subjected to the higher U.S. tax rates. The result would nudge more companies to either move more manufacturing jobs abroad, or just to decide to keep those operations overseas in the first place.

Other analysts who have looked at the new tax law closely agree that the long-term impact will be that more factories owned by U.S. companies will open overseas. “While companies will now have to pay some tax in most cases, wherever they operate, they will pay much less on what they make abroad than at home,” concluded the New York Times.

For those striving to improve supply chain sustainability worldwide, they lose under this tax cut. Companies will continue to navigate their products through a maze of suppliers, which means there will still be several problems dogging many manufacturers: products made in regions with lax environmental laws; potential labor and human rights violations; and of course, the carbon footprint of hauling goods across oceans or by airplane.

As a side note, Republican’s claims that taxes will now be able to be paid via a post card have been quickly laughed off and debunked. But if you plan on sending post cards to U.S. owned factories in the future, be sure to buy the higher-priced stamp, as you will be mailing them abroad.

Image credit: Ray Dumas/Flickr