Donald Trump framed his tax reform bill as “historic tax relief to the American people” in a speech in Indiana today. What the US president didn’t mention was it would deliver a much bigger dose of relief for US multinationals that have been stashing their non-US earnings offshore for years.
Last year advocacy group US PIRG estimated that America’s biggest companies—the likes of Apple, Microsoft and Nike—hold around $2.5 trillion offshore. That’s just below one year of UK GDP or more than twice the value of all the real estate in New York City. Those companies would have to pay $717.8 billion in federal taxes if that were all repatriated at once, US PIRG estimated.
Trump’s plan will let those companies bring that money onto American books at a one-time low rate, he said. He didn’t specify the exact rate, but during his campaign, he put the “repatriation holiday” rate at 10%, meaning the Treasury would get hundreds of billions less than at the current rate.
The argument for doing this? As Trump puts it, the money can come back into the economy and “work and work and work.” When Congress tried to do this in 2004, money did indeed come flowing back to US shores; $312 billion in gross revenue. The problem, however, was that most of it was returned to shareholders, rather than being reinvested in the US economy.
What’s more, a Senate investigation in 2011 found that nearly half of the funds nominally held abroad are actually booked in US treasuries or the US stock market; they’re just technically owned by offshore companies to avoid paying taxes on them. So repatriating those funds wouldn’t add money to the economy.
Trump’s plan goes further, however. It would permanently relieve American companies of paying tax on profits booked offshore in the future, regardless of whether or not they bring them back to the US. (Individuals will still be taxed on their worldwide income.) That frees them up to put the money anywhere. “That’s a big win for the American economy—to have all those assets freed up,” Pam Olson of PricewaterhouseCoopers told the Wall Street Journal (paywall).
However, other countries that have adopted this kind of system have “found it’s led to an enormous outflow of taxable revenue from their countries,” says Clark Gascoigne, deputy director of the Financial Accountability and Corporate Transparency (FACT) Coalition. At the moment, that outflow is “confined to a number of the largest multinationals that are booking profits offshore,” he says. “If you open up gateways indefinitely, it’s only a matter of time until more and more companies abuse the system.”