The Tax and Jobs Act was renamed because of the Byrd rule to a Bill: “To provide reconciliation pursuant to titles II and V of the concurrent resolution on the budget for fiscal year 2018.”(1) This is not the surprising part of the bill, but I had to mention it because in the ensuing discussion I will use the shorter name and I don’t want you to think that I’m misleading you about the true name.
What surprises me the most about the Tax and Jobs Act is that its territorial tax design was discussed during the Obama administration, even though our former president didn’t try to change the tax structure as President Trump has done. According to an article from 2012 titled, “A Global Perspective on Territorial Taxation,” (2) by Phillip Dittmer, “every independent U.S. advisory board working group, and federal agency tasked with exploring tax reform has recommended that the U.S. pivot toward a territorial system.”
Advocates for a territorial tax plan, Dittmer wrote, included President Obama’s Economic Recovery Advisory Board, the Council on Jobs and Competitiveness and the Commission on Fiscal Responsibility and Reform. Even the House Committee on Ways and Means in 2011 recommended territorial taxation. What occurs to me when I consider the widespread Obama administration support for a territorial system is to wonder why the democrats voted against Trump’s plan.
What I learned from Dittmer’s article is that developed economies like the UK and Japan have been moving from a worldwide tax system like the one we had before the Tax and Jobs Act was passed to a territorial system. His article explains that the worldwide system has had fewer advantages in a global context than the new territorial system has. I would say that the main purpose of the new tax structure is to support global businesses without causing as much damage to our domestic business operations. When President Trump says that it will bring jobs back to the U.S., he may be right because with a lower corporate tax rate, the U.S. becomes a more attractive base for corporate and small business operations. More foreign owned businesses may also set up here. The lesser tax rate for bringing already earned overseas profits back to the U.S. may also encourage capital to go to work by being invested in the United States.
I was surprised to learn that the worldwide tax system was designed to support globalized business operations and so also is the territorial tax system. I didn’t really expect that they would have the same goal of supporting globalization. They just do it in different ways. It may be the case that during the early period of globalization, the worldwide tax system was better. Now that globalization has evolved and there are more developing economies than the world once had, the territorial system is better. It will help global companies operating abroad to take advantage of markets there, and it will help Americans to have a more profitable business tax structure at home.
There are several ways that a territorial tax system may make doing business abroad easier and tax collection at home easier, too. Under a territorial system, foreign companies headquartered in the U.S. won’t be taxed for the profits that they earn abroad. That makes it easier for American companies to do business abroad. They don’t have to consider the influence of tax subsidies paid to offset foreign taxes (which made high tax nations more attractive) or deferred taxation that kept money out of the U.S. Treasury. And transnational companies may choose to invest more here in the U.S. because of the lesser tax rate and the convenience of operations at home.
It remains to be seen what this new Tax and Jobs Act will accomplish for the United States. Will it bring capital back that will be invested in the U.S. economy? Will it encourage healthier small businesses that compete more effectively with large corporations (that often didn’t pay any tax under the worldwide tax system)? Will it allow the U.S. government to collect more taxes from corporate businesses at home (because of more investment here instead of abroad)? Will it encourage more jobs here at home and a more competitive pricing on American made goods and services? Let’s wait and see.
Finally, this is a long bill and I haven’t read it yet. To help us all to understand some of the tax provisions that will affect average Americans, I’m including a reference to an article by Julia Horowitz titled, “34 Things you need to know about the incoming tax law,” that may help you to understand some of the details that will affect you in the bill. (3) Once again we see neoliberalism in the efforts of American politicians to support globalization. If you would like to learn more about globalization and neoliberalism, buy a copy of Political Catsup with Economy Fries, available at Amazon.com.
(1) Eli Watkins, “Senate rules force Republicans to go with lengthy name for tax plan,” Dec 19, 2017, http://www.cnn.com/2017/12/19/politics/tax-bill-name-delay/index.html, accessed Dec 22, 2017.
(2) Phillip Dittmer, “A Global Perspective on Territorial Taxation, Aug 10, 2012, https://taxfoundation.org/global-perspective-territorial-taxation, accessed Dec 21, 2017.
(3) Julia Horowitz, “34 Things you need to know about the incoming tax law, ” CNN, Your Money, Your America, http://money.cnn.com /2017/12/20/news/economy/republican-tax-reform-everything-you-need-to-know/index.html, accessed Dec 21, 2017.