Barron's Take: The tax-code overhaul of 2016 didn't put America first
According to Stephen Moore, who had advised President Donald Trump on tax policy and is now under consideration for a job on the Federal Reserve Board, the tax changes passed at the end of 2017 were about putting “American business and American workers first.” The new rules, Moore wrote, would “stop foreigners from eating our lunch and stealing our jobs” by making the U.S. more attractive as an investment destination.
Between 2010 and 2017, American companies “reinvested” about two-thirds of the profits they earned from their foreign subsidiaries—$2.4 trillion—to avoid paying U.S. corporate income tax. Despite being treated as reinvested earnings for tax purposes, the actual transactions involved offices in Ireland, the Cayman Islands, and other tax havens buying dollar-denominated bonds issued by the U.S. Treasury, Fannie Mae, Freddie Mac, Ginnie Mae, and highly rated U.S. corporations.
That said, companies could easily borrow against their holdings by issuing bonds. The odd result was that a not-negligible component of the surge in corporate debt issuance in the past few years came from multinationals effectively borrowing from each other to reward their equity investors while avoiding U.S. income taxes. Unsurprisingly, the biggest consequence of the new tax regime has been a sharp reduction in corporate borrowing.
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.
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