Tax Cuts and Jobs Act (TCJA), the Trump GOP Tax Law, Effect on Offshoring

The Tax Cuts and Jobs Act (TCJA), theTrump/GOP tax law, will not stop offshoring of industries or jobs and it will not likely have any affect on creating new jobs either. There is nothing in the TCJA that incentivizes these kinds of changes to the law that existed prior.
The previous system of taxation encouraged multinational corporations to shift profits offshore and to shift real and personal investments offshore and to shift jobs offshore as well to avoid paying U.S. taxes. It is arguable that the tax benefits to offshoring companies far outweighed the cost of labor differential that has been used to justify offshoring. This system of shifting assets offshore and deducting the cost here in the U.S. has been termed “artificial”1 and rightfully so.
Corporations were required to pay a 35% tax rate after subtracting foreign taxes paid on profits attributable to offshore activity. But the corporations were allowed to defer paying U.S. taxes almost indefinitely without any restriction or deadlines. It also allowed corporations to seek extortion tax rates from friendly Congressional Representatives at beneficial times and never pay the full tax rate statutorily required. As much as $2.6 trillion in untaxed profits offshore have been accumulated at any one time and according to the Institute On Taxation And Economic Policy, such untaxed profits allowed the corporations to avoid over $750 billion in taxes. 2
Despite campaign promises and statements of intent by President Trump during the TCJA legislative process, the TJCA did nothing to curb offshoring and the Congressional Budget Office Report indicated that the opposite is true, that offshoring would be incentivized even more so. Non-partisan think tanks such as the Institute on Taxation and Economic Policy and the Center on Budget and Policy Priorities were in substantial agreement with the CBO Report.3  The Institute on Taxation and Economic Policy stated that “real tax reform would have put an end to tax avoidance and the tax incentives for offshoring.”4
The Tax Cuts and Jobs Act (TCJA) gave companies offshore an annual deduction on their offshore earnings of 10%, including tangible assets such as production facilities. This is a tax break reserved for companies with offshore assets and is obviously an incentive for those that have not moved offshore yet.
In addition, the TCJA, created by the GOP Congress and President Trump, allows offshore related companies to deduct half of their offshore income that is 10% of the company’s tangible assets. Some offshore companies could conceivably be taxed on ½ what non-offshore related companies would pay and in some cases nothing at all.5
Since the passage of the TCJA, Bank of America showed profits up 30% and Wells Fargo CEO Tim Sloan said he would pay most of the new profits to the investors.
What about the decrease in corporate tax rates here in the U.S.? Some countries have a corporate tax rate that is still less than the corporate tax rate allowed by the TCJA. China has already said it would lower its corporate tax rate for certain areas of trade.6  So the lowering of corporate tax rate created a new race to the bottom with no trading government benefiting, only international companies. Without any incentives to hire in the U.S. the idea that lower tax rates alone would do so is foolhardy wishful thinking.
The Republican tax bill will accelerate offshoring, not disincentivise it.

  1.     New Legislation Would End Tax Incentives to Move Jobs and Profits Offshore, Richard Phillips, Senior Policy Analyst for the Institute On Taxation And Economic Policy, 10-1-2018. Found at: https://itep.org/new-legislation-would-end-tax-incentives-to-move-jobs-and-profits-offshore/
  2. Id. Citing, research found at: https://itep.org/offshoreshellgames2017/, also citing, Prof. Kimberley Clausing in a report located at: http://equitablegrowth.org/report/profit-shifting-and-u-s-corporate-tax-policy-reform/ (Estimated that the ongoing cost of offshore tax avoidance exceeded $100 billion in taxes.)
  3. New Legislation Would End Tax Incentives to Move Jobs and Profits Offshore, Richard Phillips, Senior Policy Analyst for the Institute On Taxation And Economic Policy, 10-1-2018. Found at: https://itep.org/new-legislation-would-end-tax-incentives-to-move-jobs-and-profits-offshore/
  4. Id.
  5. CBO confirms GOP tax bill will worsen offshore tax dodging While corporations receive massive tax windfalls, Rebekah Entralgo, Apr. 16, 2018.  Found at: https://thinkprogress.org/corporations-incentivized-offshore-jobs-tax-1cd19cc24ff3/
  6. China Offers Tax Incentives to Persuade U.S. Companies to Stay, Sui-Lee Wee, Dec. 28, 2017, The New York Times.  Found at:   https://www.nytimes.com/2017/12/28/business/tax-bill-china.html