Shortly after last November’s election, I posted an article entitled, “Will a Biden Administration Finally Combat Offshoring and Bring American Jobs Home?” I noted that, two months before the election, then-candidate Biden had proposed three primary changes to the corporate tax code designed to reward investments in U.S.-based operations and to penalize American companies that offshore jobs: (1) doubling the minimum tax rate on foreign earnings from 10.5% to 21% and applying that rate on a country-by-country basis; (2) imposing a 10% “offshoring penalty surtax” on profits from offshored products and services sold or provided to the U.S. market; and (3) creating a 10% “Made In America” tax credit for companies on a broad range of investments designed to create jobs in the United States.
The “Made in America Tax Plan” announced by the Biden administration earlier this month follows through on those promised proposals. Coming on the heels of the administration’s proposed infrastructure legislation designed to create American jobs, the tax plan aims to stop multinational companies from offshoring operations and jobs by eliminating offshoring incentives in the U.S. tax code.
By 2016, multinational corporations had stashed $2.6 trillion offshore, avoiding an estimated $750 billion in U.S. taxes. Despite promises to the contrary, the 2017 Tax Cut and Jobs Act exacerbated the problem by exempting from taxation offshore profits up to a 10% of return on foreign investments and taxing the remaining profits at half the rate applicable to domestic profits. As a result, large corporations continued to offshore operations and jobs, even when the pandemic devastated the U.S. economy and threw millions of Americans out of work.
Biden’s international tax reforms would reverse those offshoring incentives. The proposal would terminate the 10% exemption and would increase the tax rate applicable to offshore profits from 50% to 75% of that applicable to domestic profits. It would also reduce corporations’ ability to shield income in overseas havens by assessing minimum taxes on a per country basis, disallow deductions for the offshoring of production, and institute guardrails against corporate inversions. Overall, the proposed tax regime would substantially reduce the current tax law’s preferences for foreign profits relative to domestic profits, creating a more level playing field between domestic and foreign activity and incentivizing multinational corporations both to locate new operations (and jobs) in America and to repatriate existing operations (and jobs) from overseas.
Moreover, the Biden plan also emphasizes persuading other nations to agree to a minimum global tax by denying U.S. tax deductions to foreign companies based in countries that refuse to adopt such a minimum tax. As Treasury Secretary Janet Yellen described it, this multilateral, cooperative approach to ending tax avoidance is designed to end the “race to the bottom” by which countries compete for business operations and jobs by lowering their corporate tax rates to unsustainably low levels. As a result of such international competition, the average statutory corporate rate among industrial nations has decreased dramatically, from over 45% in 1980 to 32% in 2000 to 23% in 2020. “When other countries see us lower our rate, they lower theirs to undercut us,” Yellen explained. “The result is just a global race to the bottom.”
My earlier article concluded by urging the Biden administration to reverse the “devastating and unpatriotic trend” by which too many American companies have shipped too many jobs overseas due to perverse tax incentives and other financial considerations. The “Made in America Tax Plan” is a good – and necessary – first step.
Lauren Irwin-Szostak is the President of Business Processes Redefined, LLC, a call center solutions management firm headquartered in Fairfield, New Jersey which is certified as a woman-owned business enterprise by both the New Jersey Woman-Owned Business Enterprise (NJWBE) and the Woman’s Business Enterprise National Council (WBENC).