It’s been almost two years since the passage of the Tax Cut and Jobs Act (TCJA). In the intervening time, some critics have argued that the TCJA could be adversely affecting domestic manufacturing and job creation. But others say patience is needed in order to give the legislation time to extend its benefits throughout the wider economy. However, given the heavily subsidized competition facing many domestic American companies, there simply isn’t time to wait. U.S. manufacturers need a level playing field, and they need it now.
A key problem for American companies is that multinational competitors typically avoid paying a hefty portion of their U.S. tax obligations. They do so by channeling operations through entities chartered in low-tax nations like Bermuda and the Cayman Islands. Domestic producers can’t afford such tax avoidance schemes, though, which means that the U.S. tax code essentially provides a tax advantage for multinational behemoths that move profits overseas. This matters, since it’s clear that the TCJA failed to end multinational tax avoidance.
Yes, the TCJA did lower corporate tax rates. And it was assumed that doing so would establish a more business-friendly corporate environment. Thus, the TCJA would encourage more multinational companies to report profits accurately in the U.S., and reduce overall tax avoidance. It was also assumed that other tax avoidance issues would be addressed by the TCJA’s anti-abuse provisions (GILTI, BEAT, FDII). Unfortunately, all three have proven to be complicated in actual practice, and remain rife with problems.
Other problems have emerged with the TCJA, too. While a lower corporate tax rate was certainly welcome, other countries can simply lower their own rates to negate such an advantage. And because the GILTI provision established a minimum tax on profits earned overseas, it ended up rewarding companies that simply chose to move capital overseas. Further complicating the matter is the beneficial treatment that BEAT provides for foreign companies along with the ineffectiveness of FDII.
Multinationals were certainly pleased with the TCJA. And that gave the TCJA a business-friendly sheen — at least until the Congressional Budget Office issued a report in 2018 showing that the legislation would only reduce corporate tax avoidance by 23 percent. As a result, domestic companies are still competing against multinational companies that enjoy significant tax loopholes.
TCJA’s supporters claim that patience is needed — until the legislation demonstrates its full worth. But domestic companies continue to face a tilted playing field. They urgently need a more effective solution.
It’s time to fully tax the multinational companies that enjoy such remarkable profits on their U.S. sales. Domestic manufacturing advocates believe the answer is to adopt a new tax approach known as Sales Factor Apportionment (SFA). An SFA system would assess corporate tax liability based on profits earned from U.S. sales. Or, to describe it another way: All companies selling a product or service in the U.S. market would be required to pay taxes on the profits of those sales — no matter where they might be domiciled. Thus, it wouldn’t matter where a company is chartered. They would simply face a set corporate tax rate on their U.S. profits.
Domestic American companies are already taxed in exactly this manner. And so, an SFA system would merely require that foreign multinational companies finally play by the same rules.
This should be the logical approach to taxing multinational entities, since they generate huge profits based on access to America’s consumers. This is common sense, and it explains why SFA is starting to enjoy support among U.S. lawmakers seeking an equitable system.
Multinational companies keep trying to derail any SFA proposals, of course. But their wait-and-see approach on the TCJA and their efforts to keep avoiding U.S. taxes, have become more obvious and self-serving. Lawmakers should recognize that the time to stand up for domestic companies — and revamp a biased and ineffective tax system — has arrived.
David Morse is Tax Policy Director at the Coalition for a Prosperous America Education Fund.
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