Tax experts say Trump bill likely to send jobs overseas

On the Friday before Thanksgiving, Kenny Johnson left the Nelson Global Products plant in Clinton, Tenn., for the last time. Having devoted nearly 13 years to making tractor-trailer exhaust pipes, Johnson, 41, spent some of his final weeks at the plant watching Mexican workers train to take his job.

“They brought three or four groups at different times,” he said. “To learn the jobs that are going to Mexico.”

This was the kind of economic dislocation that President Donald Trump vowed to prevent with his “America First” policies. Over the past year, he threatened to impose a new tax on companies eyeing offshore locales and repeatedly proclaimed the imminent return from overseas of millions of lost American jobs.

But presidential jawboning has been no match for the market. To cut costs in a competitive global environment, Nelson Global executives in May announced the closure of the Clinton facility and a sister plant in Minnesota.

Clinton’s 149 jobs and equipment were distributed among company facilities in North Carolina and Monterrey, Mexico, workers said, even as the president trumpeted his agenda of economic nationalism in Washington.

“He hollered that he was gonna put a stop to that,” Johnson said. “And he obviously did not.”

Trump, in fact, might actually make things worse.

What happened to the workers in Clinton, tax experts say, will probably happen to more Americans if the Republican tax overhaul that is nearing completion becomes law. The legislation fails to eliminate long-standing incentives for companies to move overseas and, in some cases, may even increase them, they say.

“This bill is potentially more dangerous than our current system,” said Stephen Shay, a senior lecturer at Harvard Law School and former Treasury Department international tax expert in the Obama administration. “It creates a real incentive to shift real activity offshore.”

As a candidate, Trump vowed to stop companies from moving offshore by imposing a 35 percent border tax on those that sought to ship products back home from their new foreign plants.

“A Trump administration will stop the jobs from leaving America,” he told a cheering crowd in Hershey, Pa., the weekend before Election Day. “The theft of American prosperity will end.”

As president, he appeared to score a quick victory by persuading Carrier to reverse a planned relocation of 1,100 Indiana jobs to Mexico, although the company ultimately proceeded months later with hundreds of layoffs.

Trump has rejected what he called “the offshoring model” and said a simple “pro-American” tax code would be essential to reversing the job drain.

“The biggest winners will be everyday working families as jobs start pouring into our country,” he said in September.

This year, companies such as Wells Fargo, Microsemi and Caterpillar have announced plans to shift work overseas from U.S. sites, according to a Labor Department office that determines worker eligibility for retraining aid. Along with moving assembly lines, other companies, such as Apple and Microsoft, have in the past avoided U.S. taxes by formally assigning the intellectual property behind innovative products — and the profit that comes from them — to foreign jurisdictions.

The United States loses about $100 billion annually in foregone tax payments to corporate-profit shifting, says Kimberly Clausing, an economics professor at Reed College who specializes in the taxation of multinational firms.

The final version of the tax bill is expected to reduce the U.S. corporate tax rate from 35 percent, one of the world’s highest, to 21 percent. That change, a response to long-standing pleas from the business community, is designed to encourage more investment in the United States, which in turn would create more jobs and lift wages.

Yet as Congress nears a final vote on the almost 500-page legislation, some workers have soured on the plan.

“Knowing President Trump, it’ll probably benefit companies and the higher-up people more than everyday workers like us,” said Johnson, who earned $16 an hour as a materials handler.

Under current law, the 35 percent corporate tax is due on profits earned overseas only when they are returned stateside. The legislation, however, would permit the estimated $2.6 trillion that corporations have stockpiled outside the country to return to the United States subject to a rate expected to be just below 15 percent.

In the future, corporations would be required to pay a 10 percent minimum tax on overseas income above a certain level. The provision is billed as a way to discourage the movement of jobs and profits overseas. But the fine print of that new global minimum tax would make the problem worse, several tax specialists said.

“The overall effects of this are going to be unambiguously bad for the workers that it’s ostensibly designed to help,” Clausing said.

There are three reasons, according to nonpartisan tax experts. First, a corporation would pay that global minimum tax only on profits above a “routine” rate of return on the tangible assets — such as a factory — that it has overseas. So the more equipment a corporation has in other countries, the more tax-free income it can earn. The legislation thus offers corporations “a perverse incentive” to shift assembly lines abroad, says Steve Rosenthal of the Tax Policy Center.

Second, the Senate bill sets the “routine” return at 10 percent — far more generous than would typically be the case. Such allowances are normally fixed a couple of percentage points above risk-free Treasury yields, which are currently around 2.4 percent.

As a result, a U.S. corporation that builds a $100 million plant in another country and makes a foreign profit of $20 million would pay roughly $1 million in tax versus $4 million on the same profits if earned in the United States, says Rosenthal, who has been a tax lawyer for 25 years and drafted tax legislation as a staff member for the Joint Committee on Taxation.

Finally, the minimum levy would be calculated on a global average rather than for individual countries where a corporation operates. So a U.S. multinational could lower its tax bill by shifting profits from U.S. locations to tax havens such as the Cayman Islands.

It’s unclear how taxes affected Nelson Global’s restructuring decision. Company officials did not respond to multiple telephone and email requests for comment. As a rule, numerous factors shape corporate location decisions, such as relative wage rates, proximity to customers and the availability of workers.

To really slam the door on offshoring, the minimum tax should be calculated on a country-by-country basis, and the rate should be set closer to the 20 percent U.S. rate, Rebecca Kysar, a professor at Brooklyn Law School who specializes in international tax law, and other analysts say.

Companies also are likely to continue to place valuable intellectual property overseas to pay a lower rate than the new U.S. rate, likely to be around 20 percent, analysts said.

“The plan does not meaningfully reduce the incentives for companies to move their operations and shift their income overseas,” Kysar said. “You could say it will make things worse.”

SundayMonday Business on 12/17/2017

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