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Trump Reversal on International Taxes Could Hurt U.S. Workers

Treasury Secretary Steven Mnuchin said today that the Administration places “very, very, very high” importance on its proposal for a territorial tax system that, President Trump says, will “level the playing field for American companies” — but that, in reality, risks disadvantaging small and domestic U.S. businesses relative to multinationals and threatening U.S. revenues and wages.

Mnuchin’s comments highlight a key reversal in President Trump’s tax policy between his campaign and his presidency. While his tax plan largely mirrors his campaign tax plan, providing more than $5 trillion in tax cuts mostly for the wealthy, one big change is its proposal for a territorial tax system, which would exempt the foreign profits of U.S. multinational corporations from U.S. taxes. The campaign plan would have required U.S. multinationals to immediately pay tax on their foreign profits at the same rate as domestic profits.

As our brief explains, a territorial system would bring the following problems:

  • “Territorial” means “zero tax rate” on foreign profits. Under a territorial tax system, U.S.-based multinational corporations would pay U.S. corporate taxes on their domestic profits, but no U.S. taxes on their foreign profits. That would give a massive tax advantage to U.S. multinationals’ foreign profits, which would face a zero tax rate rather than the 15 percent rate that President Trump proposes for domestic profits. (See chart.)
  • A tilt to U.S. multinationals. Far from “leveling the playing field,” a territorial system would give large U.S. multinationals a big new incentive to engage in complex tax maneuvers to report that they earned their U.S. profits offshore so they can avoid paying U.S. taxes. That, in turn, would give them a major tax advantage over U.S. businesses — including small businesses — that don’t have foreign operations and can’t orchestrate complex tax avoidance maneuvers.
  • U.S. wages and investment could fall. If a lower U.S. tax rate on foreign profits encouraged U.S. corporations to move investments offshore, it could hurt U.S. workers’ wages and productivity. As Congressional Research Service tax economist Jane Gravelle told Congress, “[Moving to a territorial system] would make foreign investment more attractive. That would cause investment to flow abroad, and that would reduce the capital which workers in the United States have, so it should reduce wages.”

There are sound ways to reform the international tax system in order to reduce both corporate tax avoidance and the tax advantage that foreign profits now enjoy. The President’s territorial system, however, would worsen these problems, and his repeated promises to fight for American jobs and workers ring hollow in light of this proposal.