Trump's Corporate Tax Changes Did Not Put 'America First'
Trump’s Corporate Tax Changes Did Not Put ‘America First’March 28, 2019 at 6:00 a.m. ET
By Matthew C. Klein at Market Watch, Barron's
https://www.marketwatch.com/articles/sorry-but-trumps-corporate-tax-changes-did-not-put-america-first-51553767200?mod=mw_theo_homepage
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U.S. corporations earned about $520 billion in profits from their foreign subsidiaries in 2018 and collected $665 billion in dividends. The difference represents the total amount of “offshore” cash that was “repatriated” to the U.S. thanks to the new tax rules—about 6% of the total that had been accumulated since 2010. That is not a flow, but a trickle. Moreover, the trickle was short-lived. Foreign subsidiaries of U.S. companies sold assets only in the first half of 2018. By the third quarter, they were once again “reinvesting” their profits, albeit at a lower rate than in previous years. At current rates, the total accumulated sum of reinvested earnings should exceed its previous peak by the middle of 2020, if not before.
At the same time, American companies have increased their investment abroad. “Equity outflows other than reinvestment of earnings” surged in 2018 to their highest level since the financial crisis. The likeliest explanation is that the new tax regime encourages this behavior. Under the new rules, the amount of income that can be earned tax-free from a foreign subsidiary is capped by the value of tangible assets—offices, factories, machines, and so on—owned by that subsidiary. As a recent analysis in The Wall Street Journal put it, “companies can increase their FDII [foreign-derived intangible income] deduction by reducing the amount of tangible capital—such as factories and equipment—that they have in the U.S.”
The net effect is that U.S. companies are investing as much abroad as they were before, now that repatriation seems to have ended:
Foreigners have not responded to the new tax environment by increasing their investment in the U.S., either. While America’s lowered tax rate seems to have encouraged companies based in high-tax jurisdictions such as France, Germany, and Japan to retain more of their U.S. profits in their subsidiaries here, this has been more than offset by reduced inflows from other sources. Foreign direct investment inflows to the U.S. were lower in 2018 than in 2017, 2016, and 2015. Foreign direct investment inflows were also larger in the late 1990s and the mid-2000s, even though the U.S. economy was much smaller back then and the tax environment was ostensibly less attractive:
Foreign investment is not necessarily desirable, and there can be good reasons for American companies to invest abroad to get closer to their customers. But the data suggest the new rules have failed to perform as advertised.
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