The Tax Cuts and Jobs Act has made America a more competitive economy because of the reduction in the corporate tax rate and the creation of a modern, territorial system of taxation.
Although these benefits have been ignored or subject to unfair scrutiny by Democrats, their success is clear. Moving forward, lawmakers should protect these reforms and continue building upon them so that the U.S. remains competitive.
Already, these reforms have produced clear economic wins. Since the passage of tax reform, quarter-by-quarter GDP growth equaled 3.1 percent in 2018, and wages grew by 3.4 percent.
Unemployment recently hit a 50-year low, labor force participation is improving after years of stagnation, and workers are seeing more take-home pay and new employee benefit programs.
Additionally, America has been named the most competitive economy in the world, and this strong growth is lifting the global economy.
International tax reform was long overdue
The reason the U.S. is now competitive is clear. Prior to tax reform, the U.S. was one of only seven countries in the developed world to have a worldwide system of taxation. This system subjected American businesses operating overseas to double taxation — once in the country where this income was earned and again when it was brought back to the U.S.
This worldwide system (in combination with the fact that the U.S. had the highest corporate rate in the developed world) created a situation where American businesses could not compete on an international scale.
This also created perverse incentives for businesses to relocate to foreign countries with less burdensome tax systems. In fact, 28 developed countries had a territorial system of taxation, which meant they taxed ordinary business income only when it was earned in that country.
Between 2004 and 2014, nearly 50 American businesses inverted, according to the Congressional Research Service.
The uncompetitive tax code and the pre-TCJA tax code also meant U.S. businesses were losing hundreds of billions of dollars in assets because they were at a disadvantage when competing for mergers and acquisitions. It also left American businesses vulnerable to being acquired by foreign companies.
The new tax code will keep jobs and businesses in America
Tax reform fixed this problem by moving the U.S. closer to a territorial system of taxation by reducing the double taxation of American businesses and allowing trillions of dollars in previously stranded foreign income to be repatriated into the economy.
The law also enacted several new provisions to protect the tax base and encourage businesses to locate capital and profits in the U.S. Two provisions “global intangible low-taxed income,” or GILTI, and “foreign-derived intangible income,” or FDII, act in concert as a carrot and stick approach to discourage shifting intangible income overseas and to encourage U.S. companies to house their IP in America.
Tax reform also enacted the “base erosion anti-abuse tax,” or BEAT, which is designed to prevent shifting of income to lower tax jurisdictions.
As noted by the president’s Council of Economic Advisers, the reforms have encouraged doing business in the U.S. — real private investment is up 8 percent while U.S. direct investment abroad has dropped.
Policymakers must protect the integrity of the tax cuts through regulatory fixes
While the international reforms in the TCJA will improve the tax code, the inherent complexity of the law has led to some unintended consequences.
Because of the interactions between multiple sections of the code, the tax law is inadvertently subjecting U.S. businesses to GILTI taxation on foreign income that has already been taxed and that was previously exempt from U.S. taxation.
There is no evidence that Congress intended this outcome. At the time TCJA was passed, the Senate conference report clearly stated that lawmakers intended to exclude high-tax income from GILTI. The rationale here is simple: High-tax foreign income has already been subjected to tax where it was earned, so there is no policy problem and no need for the U.S. to impose additional tax.
Fortunately, this problem can be addressed by the Treasury Department through applying an existing high-tax exception that exists in the tax code under Subpart F. These rules have existed for decades to protect against double taxation and ought to be expanded to uphold the integrity of the tax law and help ensure the code remains competitive.
While this glitch should be fixed, the structure of the Tax Cuts and Jobs Act is sound. The success of the law is clear: America is more competitive and businesses are able to compete and thrive.
Alexander Hendrie is the director of tax policy at Americans for Tax Reform.
