While the election results remain up in the air, the likelihood of a Biden presidency appears to be increasingly likely. How would a Biden administration address the offshoring of American jobs by American companies that appears to have accelerated under the Trump administration? Time will tell, obviously, but a tax plan announced by Biden less than two months ago promises to reverse the offshoring incentives enacted by Trump’s 2017 tax cuts.
As I have written about previously, the Trump tax cuts reduced the corporate tax rate on domestic earnings from 35% to 21% but further encouraged offshoring operations in two primary manners. First, the new law created an annual deduction on offshore profits equal to 10% of offshore tangible assets, thereby motivating American businesses to increase their offshore assets in order to increase the amount of earnings they can deduct. Second, the new law also allowed companies to deduct half their offshore income above 10% of their offshore tangible assets, thereby creating an effective tax rate of just 10.5 percent on foreign earnings – half the 21% rate applicable to domestic earnings – above that 10% tangible asset threshold. As a result, during the first 18 months of the Trump administration, the top 100 federal government contractors offshored jobs at a rate nearly two and a half times greater than that during the Obama administration, according to one analysis.
On September 9, 2020, Biden 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. First, Biden’s plan would eliminate the offshoring incentives of the 2017 Trump tax cuts discussed above by doubling the minimum tax rate on foreign earnings from 10.5% to 21% and applying that rate on a country-by-country basis, rather than blending foreign income with domestic income taxed at lower rates. Second, Biden’s plan would not only increase the corporate tax rate on domestic earnings to 28% – i.e., the midpoint between the 21% rate created by Trump’s tax cuts and the 35% rate they reduced – but also impose an additional 10% “offshoring penalty surtax” on profits from offshored products and services sold or provided to the U.S. market, thereby establishing a 30.8% rate on foreign earnings. Third, Biden’s plan would create a 10% “Made In America” tax credit for companies on a broad range of investments designed to create jobs in the United States, including investments in revitalizing closed or nearly closed facilities and in retooling or expanding other facilities.
In addition to those proposed changes to the tax code, Biden also pledged to sign six “Buy American” executive orders during his first week in office. Those executive orders would tighten current rules governing federal procurement to favor American-made goods and services even more strongly. After campaigning on an “America First” agenda, Trump signed a series of his own “Buy American” executive orders with great fanfare, only to ignore them thereafter. For example, Trump’s first “Buy American” executive order in April 2017 required federal agencies to gather information and submit annual reports about procurement practices, but three and a half years later, no such reports have been submitted.
Of course, even if the ongoing vote counts ultimately yield a Biden presidency, several questions would surround his announced plans to combat offshoring. For one, it is unclear whether, or how strongly, Biden would pursue his announced plan. After all, Biden is a lifelong free trader who supported NAFTA and other globalist initiatives throughout his 36 years as a U.S. senator, and the Obama administration (in which he served as vice president) did little to combat offshoring in its eight years of power. For another, even if Biden aggressively promoted his plans, Republicans will continue to control the U.S. Senate, and they have bottlenecked numerous legislative proposals designed to curtail offshoring and repatriate jobs for years. Finally, even if Biden’s proposals become law, their ultimate effectiveness is debatable. The net advantages to businesses of domesticating operations would be uncertain, and if the ongoing pandemic has proven anything, it is that patriotic pleas to bring jobs home are not enough to reverse offshoring so long as financial incentives for it continue to exist.
Still, Biden’s promised changes to the corporate tax code and “Buy American” executive orders are a welcome, and necessary, first step to jumpstart our ravaged economy. America and its citizens need jobs now. More than enough jobs exist, but American companies have shipped too many of them overseas due to perverse tax incentives and other financial considerations. A Biden administration must immediately reverse that devastating and unpatriotic trend.
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).