Sen. Sherrod Brown, D-Ohio, is making a lot of political hay over General Motors’ decision to close a plant in Lordstown, Ohio (they have also announced they are expanding operations in Mexico). The senator is dusting off the old “shipping jobs overseas” playbook that Democrats have used for the past decade, but he’s got a problem in doing so: The Tax Cuts and Jobs Act already solved the very issue he’s complaining about.
Prior to the passage of last year’s landmark tax reform law, the international aspects of the U.S. tax code were a mess. If a company made a profit and created jobs here, they owed a 35 percent corporate income tax rate—a rate which, when combined with state corporate tax rates, was the highest in the developed world. By contrast, if that same company made a profit and created jobs overseas, they owed precisely nothing to the United States—a 0 percent tax rate. Provided they kept their money offshore, companies could avoid paying any tax to the IRS on these profits indefinitely, theoretically forever.
The Tax Cuts and Jobs Act changed all that. One provision in particular (the “Global Intangible Low Taxed Income” tax) is responsible. Rather than paying absolutely nothing to the IRS, companies choosing to make a profit overseas now have to effectively pay a 10.5 percent tax rate at a minimum—either to the foreign country’s corporate tax structure, or if they are in a tax haven, to the IRS. For example, if a company is in a country with a 0 percent tax rate, they have to pay a 10.5 percent GILTI tax to the U.S.
Let’s pause there for a moment. Before tax reform, a U.S. company operating in an international tax haven paid zero (or close to zero) tax to that foreign country (that’s what makes it a tax haven). Thanks to perpetual deferral, the U.S. company also paid nothing to our IRS. Now, after tax reform, that same U.S. company in that same tax haven will have to pay a 10.5 percent GILTI tax to the U.S.
Thus, tax reform actually raised the U.S. tax on firms operating tax-free overseas from 0 percent to 10.5 percent.
Brown is claiming tax reform did these companies a favor by giving them a break from the new U.S. corporate income tax rate of 21 percent. He’s calling the 10.5 percent GILTI rate a “50 percent coupon” off the U.S. rate.
That’s backwards logic. These companies went from paying 0 percent to 10.5 percent. It’s fine for Brown to say the GILTI rate should be higher than it is, but it’s intellectually dishonest for him to claim the Tax Cuts and Jobs Act cut the U.S. tax rate on earnings realized in low-tax jurisdictions.
Furthermore, it’s perfectly obvious that GM isn’t shutting down their Ohio plant for tax reasons—in fact, they are doing so despite the U.S. tax advantage that the Tax Cuts and Jobs Act created. Prior to tax reform, GM faced a U.S. corporate rate of 35 percent. That has been reduced to 21 percent. By contrast, Mexico’s corporate income tax rate is 30 percent. So GM is moving despite a lower U.S. tax rate.
Prior to tax reform, if GM decided to invest in U.S. manufacturing equipment, they could deduct half the cost from their taxable income and the rest would be subject to long and complex “depreciation” deductions over several years. After tax reform, GM or any other company can deduct the entire cost of business equipment. In Mexico, none of it can be deducted up-front and all equipment investment is subject to slow, multi-year cost recovery.
Even before tax reform, the U.S. was a better tax environment to make investments than Mexico was, and that advantage has grown tremendously after tax reform.
Let’s say Brown got his way. As I understand it, he wants the 10.5 percent GILTI tax rate (which used to be 0 percent before tax reform) to be raised to 21 percent (the same as the U.S. corporate rate after tax reform) in cases like GM’s. Mexico has a 30 percent tax rate. That’s higher than both the 10.5 percent GILTI rate under current law and the 21 percent GILTI rate in Brown’s proposal. GM will pay the Mexican 30 percent rate in either scenario. Don’t forget—under GILTI, the U.S. company operating overseas pays the higher of the GILTI rate or the foreign country’s tax rate.
Brown’s idea is a virtue signal, and is not serious tax policy.
Tax competition is working. When the U.S. cut our corporate rate down to 21 percent, the rest of the world sat up and took notice. Australia, Canada, Ireland, and the United Kingdom have all said they need to examine ways to reduce their own tax rates and accelerate their own investment cost recovery systems in order to compete with the U.S. tax reform. Capital expenditures have shot up in the U.S. since tax reform. Hundreds of billions of dollars in perpetually deferred overseas earnings have been repatriated to the U.S. in just the past year. Wages are recovering from a decade of the “new normal.” Unemployment is at all-time lows. Business and consumer confidence metrics are at all time highs.
Just about the worst thing we could do right now would be to make the U.S. a less attractive place to invest. One company’s boneheaded decision to shift operations to a country where they are going to pay higher taxes than they would pay here is between them and their rightfully skeptical shareholders. It is not a place for grandstanding by a senator who knows better.
Ryan Ellis (@RyanLEllis) is president of the Center for a Free Economy.
