The Numbers Are In, and Trump’s Tax Cuts Are a Bust

By Marshall Auerback, a market analyst and commentator. Produced by Economy for All, a project of the Independent Media Institute

The most commonly heard refrain when Donald Trump and the GOP were seeking to pass some version of corporate tax reform went something like this: There are literally trillions of dollars trapped in offshore dollar deposits which, because of America’s uncompetitive tax rates, cannot be brought back home. Cut the corporate tax rate and get those dollars repatriated, thereby unleashing a flood of new job-creating investment in the process. Or so the pitch went.

It’s not new and has never really stood up to scrutiny. Yet virtually every single figure who lobbied for corporate tax reform has made a version of this argument. In the past, Congress couldn’t or wouldn’t take up the cause, but, desperate for a political win after the loss on health care, Trump and the GOP leadership ran with a recycled version of this argument, and Congress finally passed the Tax Cuts and Jobs Act on December 22, 2017. The headline feature was a cut in the official corporate tax rate from 35 percent to 21 percent.

So did reality correspond to the theoretical case made for the tax reform bill? We now have enough information to make a reasonably informed assessment. Unless you think that tax havens like Ireland, Bermuda or the Cayman Islands, all of which continue to feature as major foreign holders of U.S. Treasuries, have suddenly emerged as economic superpowers, the more realistic interpretation of the data shows the president’s much-vaunted claims about the tax reform to be bogus on a number of levels. Even though some dollars have been “brought home,” there remain trillions of dollars domiciled in these countries (at least in an accounting sense, which I’ll discuss in a moment). If anything, the key provisions of the new legislation have given even greater incentives for U.S. corporations to shift production abroad, engage in yet more tax avoidance activities and thereby exacerbate prevailing economic inequality. Which, knowing Donald Trump, was probably the whole point in the first place.

This tax bill was constructed on a foundation of lies. To cite one obvious example, the real U.S. corporate tax rate has never been near the oft-cited 35 percent level. As recently as 2014, the Congressional Research Service estimated that the effective rate (the net rate paid after deductions and credits) was around 27.1 percent, which was well in line with America’s international competitors.

But even the new and supposedly more competitive 21 percent rate has not been as advertised. As Brad Setser (a senior fellow at the Council on Foreign Relations) has illustrated, the new tax bill also included a provision that enabled “companies that shift their profits abroad to pay tax at a rate well below the already-reduced corporate income tax…Why would any multinational corporation pay America’s 21 percent tax rate when it could pay the new ‘global minimum’ rate of 10.5 percent on profits shifted to tax havens, particularly when there are few restrictions on how money can be moved around a company and its foreign subsidiaries?” The upshot, as Setser concludes, is that “the global distribution of corporations’ offshore profits—our best measure of their tax avoidance gymnastics—hasn’t budged from the prevailing trend.”

Although this new 10.5 percent rate applies to “global intangibles,” such as patents, trademarks, and copyrights, the legislation still creates incentives for companies (notably pharmaceuticals and high-tech companies) to shift investment in tangible assets as well (such as factories) in order to maximize the benefits of this global rate on intangibles.

Many anticipated this result at the time the new law was enacted. The legislation incentivizes increased offshore investment in real assets such as factories, because the more companies invest in these “tangibles” in offshore low tax jurisdictions such as Ireland, the easier it becomes to incur a “calculated minimum tax on your offshore intangible income (the patents and the like on a new drug, for example),” according to Setser.  The effect is also to exacerbate the trade deficit. A $20 billion jump in the pharmaceutical trade deficit last year provides excellent evidence of this trend. Ironically, this works at variance with Trump’s “America First” trade nationalism, and his concomitant efforts to wield the tariff weapon in order to disrupt global supply chains and get corporate America to re-domicile investment at home.

Parenthetically, a further political by-product has been to give the deficit hawks more political ammunition in their goal to cut supposedly “unsustainable” social welfare expenditures, perpetuating even greater economic inequality, on the grounds of insufficient tax revenues to “fund” these programs. That is another lie (see this New York Times op-ed by Stephanie Kelton to understand why).

As for the other bogus arguments used to justify this legislation, it is worth noting that most of dollars allegedly “trapped” overseas are in fact domiciled in the U.S. They have been classified as “offshore” purely for tax accounting purposes. Yves Smith of “Naked Capitalism,” for example, has pointed out that Apple stored the dollars “related to its Irish sub in banks in the US and managed it out of an internal hedge fund in Arizona.” Similarly, the Brookings Institute notes that American tax accounting rules do not place geographic restrictions on where those U.S. dollars are actually held, even if the Treasury data records them as “offshore” for tax purposes. Quite the contrary: “[T]he financial statements of the companies with large stocks of overseas earnings, like Apple, Microsoft, Cisco, Google, Oracle, or Merck…show most of it is in U.S. treasuries, U.S. agency securities, U.S. mortgage backed securities, or U.S. dollar-denominated corporate notes and bonds.” In other words, the dollars are “home” and invested in the U.S. financial system.

So in what ways are the dollars actually “trapped” (i.e., unavailable for domestic use without severe tax repercussions)? They have never been so in reality. Through financial engineering, the banks that have held the dollars “offshore” on behalf of these American multinationals have extended loans against the stockpile so as to “liberate” the capital to be used as the companies saw fit. It’s a form of hypothecated lending. Not only has the resultant “synthetic cash repatriation” provided a nice margin for what are effectively risk-free loans, but it also has enabled the beneficiary companies to deploy the dollars within the U.S. while avoiding tax penalties.

But here’s the key point: instead of investing in new plants and equipment, a large proportion of these dollars have instead been used for share buybacks or distributed back to shareholders via dividend payments. Anne Marie Knott of quantifies the totals: “For the first three quarters of 2018, buybacks were $583.4 billion (up 52.6% from 2017). In contrast, aggregate capital investment increased 8.8% over 2017, while R&D investment growth at US public companies increased 12.5% over 2017 growth.” So the top tier again wins in all ways: net profits are fattened, shareholders get more cash, and CEO compensation is elevated, as the value of the stock prices goes higher via share buybacks.

The dollars, in other words, have only been “trapped” to the extent that corporate management has chosen not to deploy them to foster real economic activity. “Punitive” corporate tax rates, in other words, have been a fig leaf. But the American worker has derived no real benefit from this repatriation, which was the political premise used to sell the bill in the first place.

Since the passage of the tax bill, the data show no significant evidence of corporate America bringing back jobs or profits from abroad. In fact, there is much to suggest the opposite: namely, that tax avoidance is accelerating in the wake of the legislation’s passage, rather than decreasing. Consider that the number of companies paying no taxes has gone from 30 to 60since the bill’s enactment.

But it’s worse than that, as Setser highlights:

“Well over half the profits that American companies report earning abroad are still booked in only a few low-tax nations—places that, of course, are not actually home to the customers, workers and taxpayers facilitating most of their business. A multinational corporation can route its global sales through Ireland, pay royalties to its Dutch subsidiary and then funnel income to its Bermudian subsidiary—taking advantage of Bermuda’s corporate tax rate of zero.”

Again, the money itself does not make this circuitous voyage. These are all bookkeeping entries for accounting purposes. In another report, Setser estimates the totals in revenue not accrued by the U.S. Treasury to be equivalent to 1.5 percent of GDP, or some $300 billion that is theoretically unavailable for use on the home front.

Global tax arbitrage, therefore, runs in parallel with global labor arbitrage. That’s the real story behind globalization, which its champions never seem to mention, as they paint a story of worldwide prosperity pulling millions out of poverty. However, as I’ve written before, “a big portion of Trump voters were working-class Americans displaced from their jobs by globalization, automation, and the shifting balance in manufacturing from the importance of the raw materials that go into products to that of the engineering expertise that designs them.” During the 2016 election and beyond, Trump has consistently addressed his appeals to these “forgotten men and women.” Yet the president’s signature legislative achievement, corporate tax reform, suggests that his base continues to receive nothing but a few crumbs off the table. The tax reform also works at variance with the main thrust of his trade policy or, indeed, his restrictionist immigration policies (and it’s questionable whether these forgotten voters are actually deriving much benefit from those policies either). Not for the first time, therefore, the president’s left hand is working at cross-purposes with the right. The very base to whom he continues to direct his re-election appeals get nothing. And the country as a whole remains far worse off as a result of his policy incoherence and mendacity.

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  1. Larry

    A very nice summary that details how the new boss is the same as the old boss, just more offensive on Twitter. The only place where Trump’s campaign promises seem to hold up at all are the sound and furry over trade with China and the border wall with Mexico. Nothing will come of this bluster most likely, but at least it makes it appear that Trump is still working on behalf of his base.

  2. Ignacio

    Will these voters realise what is really happening? Which are the alternative narratives they are receiving/accepting?

    1. Monty

      Spoiler alert: NO. As long as the alternative is giving free healthcare to undocumented immigrants, learning to code, reparations and a focus on transgender rights.

      1. marym

        Is this the actual alternative or, at least in part, a fear mongered version of universal benefits like M4A or a jobs program; civil rights; and righting some of the wrongs of the past? It preserves the status quo or promotes it becoming even more inequitable to convince people to reject any option that also helps someone not like them, or offers relief for a problem they never had or surmounted on their own. I mean, no viable politician is “focusing on transgender rights” or doing more than barely (and opportunistically imo) giving lip service to reparations. Is the rejection of any move toward justice or equity just the result of propaganda, or are we fundamentally unable to do any better without resentment? I’m very pessimistic at the moment.

          1. marym

            No – have I misjudged? I know at least some have said they’d sign on to a “study” of reparations, even Sanders eventually, but he’s been clear that he doesn’t think “writing a check” is the way to address problems in distressed communities. M4A that included undocumented immigrants wouldn’t bother me from a candidate who supported a path to citizenship and humane forms of enforcing future immigration restrictions, and I’m not opposed to transgender rights so maybe some of that wouldn’t seem so fearsome to me if I heard it. Why it should be fearsome enough to disqualify a candidate with a platform of universal or widely distributed social benefits, economic justice, and criminal justice reform is inexplicable and sad to me.

            1. Monty

              It doesn’t matter how you understand it. It only matters what contorted misrepresentations of Democrat’s actual policies that ‘regular folks’ aka greedy, selfish, frightened ‘suburban republicans’ (aka a majority of voters in most states) can be led to believe.
              The focus on these kind of divisive topics is the gift that keeps giving for the right wing. What you see as reasonable, they see as a threat to their way of life. So while virtue signalling to one group, they are simultaneously alienating another and galvanizing their own opposition against them.

              1. Dick Swenson

                It seems clear that no one who discusses M4A has ever done a complete cost-benefit analysis on the simple economics of it. In doing so, incude the cost of the profits of Medical Insurance Executives; the cost of the Health Benefits subsidized by our government for government emplyees including all those millionaires who are elected to Congress; the cost of litigating medical claims; the cost of bankruptcy for those who borrow to pay for mediccal care, etc. Do a complete cost analysis of our present system!

                And then note that no one is proposing to eliminate the patient’s right to a doctor and medical facility of his or her own choosing.

                All it is is a single payer system, not a revolution in medica care.

    2. False Solace

      This is why Trump screams about immigrants so loudly. It’s all he’s got. When the facts aren’t on your side, pound the table. Remember this is the guy who invented birtherism. He won’t lift a finger for his voters but he sure knows how to yell about foreigners. He also promised not to cut Social Security or Medicare then submitted a budget that makes them look like Jack the Ripper victims.

      1. Ignacio

        Yes, i think it is as simple a that. Progressives should just ignore racist and antimigrant discourse and focus on Health care, infrastructures, GND, jobs etc.

    3. sharonsj

      Voters don’t realize what is really happening because (1) nobody tells them and (2) most don’t want to know anyway. Besides, politicians are happy with this arrangement because they can line their pockets with campaign money and other perks.

  3. a different chris

    >Again, the money itself does not make this circuitous voyage.

    Haha the one way you gold bugs could get me on board is if you were able to force all cross-border money flows to be limited to actual, physical gold. Ideally in wooden sailing ships.

    That would change things quite a bit.

  4. The Rev Kev

    Good article this. Trump must know that the whole thing is just financial shenanigans. After all, that has been his specialty for the past few decades. But he and Washington went along with it anyway and now America’s financial situation is even worse. Every actor is trying to make out in their game and hopes that the consequences fall after they have exited the market. Maybe they think that at that stage they will be able to swoop in and grab up everything else on the cheap. Having just read some history on France in 1848 and 1871 I think that the may be playing with fire and not the FIRE that they are used to.

  5. Softie

    The idiots take over the final days of crumbling civilizations. Idiot generals wage endless, unwinnable wars that bankrupt the nation. Idiot economists call for reducing taxes for corporation and the rich and cutting social service programs for the poor. They project economic growth on the basis of myth. Idiot industrialists poison the water, the soil, and the air, slash jobs and depress wages. Idiot bankers gamble on self-created financial bubbles. Idiot journalists and public intellectuals pretend despotism is democracy. Idiot intelligence operatives orchestrate the overthrow of foreign governments to create lawless enclaves that give rise to enraged fanatics. Idiot professors, “experts”, and “specialists” busy themselves with unintelligible jargon and arcane theory that buttresses the policies of rulers. Idiot entertainers and producers create lurid spectacles of sex, gore and fantasy. There is a familiar checklist for extinction. We are ticking off every item on it.

    – Chris Hedges, America: The Farewell Tour

    1. RMO

      I really hope we’re not past the point of no return and falling into a state of collapse but…

  6. JimTan

    Maybe we should create a ‘national intangibles tax’, and levy it specifically on the patents, trademarks, and copyrights of all U.S. domiciled companies, and on these ‘intangibles’ for all companies that have the majority of their common equity securities registered in the U.S.

  7. Tim

    Well, lets just get rid of corporate taxes and tax the heck out of the shareholders. No more games.

  8. Mael Colium

    It’s well overdue for a Corporate tax on gross revenue. Scrap the net income tax method and collect taxation at point of sale. If it’s so efficient for consumers to be taxed on consumption, then why not apply the same principle to corporates sales? Let them try and dodge that one.

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