Friday, January 12, 2018

When Desperate Congress-People Rush to Pass Bills They Do Not Understand

Shock! Which elected legislators would ever do such a thing? The entire GOP majority in the Senate and virtually the entire GOP majority in the House. The “hey, rich American corporations are not rich enough, so let’s add well over $1 trillion to the deficit and give them even more that the rest of us will pay for over many years” tax reform bill that Donald Trump signed into law late last year. And “let’s soak high state income tax blue states” and give lots of other a minor and very temporary tax cut to Americans in red states to make them think that they are beneficiaries of tax reform… and make their healthcare and general cost of living a whole lot more expensive.

I’ve already blogged about how giving US corporations a cash windfall has historically produced a flurry of stock buybacks and a host of mergers and acquisitions that inevitably require massive layoffs to justify these corporate activities. Bottom line, the GOP and the Trump administration argued that the new tax bill will generate “jobs, jobs, jobs,” when it really is an accelerator of “income inequality, income inequality, income inequality.”

Optics matter more than substance, it seems. For example, AT&T presented an immediate raise and bonus to a large segment of the employees as an example of how they intended to share their newfound largesse from the tax savings; they neglected to tell us that this was the product of collective bargaining with their unions and not their largesse… having nothing to do with the tax cut.

Even for those few companies using their windfall to invest in capital improvement, virtually all that money is going into job-cutting automation, so the companies that own this equipment will now earn the money that used to be made by human workers. For semi-skilled and many skilled blue collar workers, displaced first by globalization and then by artificial intelligence-driven automation, this is nothing but bad news. They are not getting their jobs back. America is not sliding back into its former economic structure. They will continue to be displaced. Their former bosses will just continue to get richer. They will not. And unfortunately, these individuals are the core of Donald Trump base. Betrayal? Yes, but when you live in a world of alternative facts, you probably will never figure that out and will soon be accorded another Trump-recommended “enemy” to blame for their continued demise.

But what is particularly fascinating about this new tax statutes, an element that I have not discussed before, is the notion of how much more clearly overseas earnings of American corporations can remain overseas at vastly reduced U.S. taxes. Huh? What about all that treaty-killing rhetoric from Donald’s campaign, the threat to punish American companies that keep significant overseas operation or move work away from the United States? Just remember how the GOP/Trump world operates: when it comes to “social conservatism” and “white preference,” the base gets its way; when it’s about wealth-generation and money, the rich get their way. So when you look at the potential impact of this tax law on overseas corporate operations, as did the January 8th New York Times, you get a much clearer picture of the law of (un?)intended consequences:

“‘Factories will be pouring into this country,’ Mr. Trump told a crowd in St. Charles, Mo., in November. ‘The tax cut will mean more companies moving to America, staying in America and hiring American workers right here.’

“The bill that Mr. Trump signed, however, could actually make it attractive for companies to put more assembly lines on foreign soil.

“Under the new law, income made by American companies’ overseas subsidiaries will face United States taxes that are half the rate applied to their domestic income, 10.5 percent compared with the new top corporate rate of 21 percent.

“‘It’s sort of an America-last tax policy,’ said Kimberly Clausing, an economist at Reed College in Portland, Ore., who studies tax policy. ‘We are basically saying that if you earn in the U.S., you pay X, and if you earn abroad, you pay X divided by two.’

“What could be more dangerous for American workers, economists said, is that the bill ends up creating a tax break for manufacturers with foreign operations. Under the new rules, beyond the lower rate, companies will not have to pay United States taxes on the money they earn from plants or equipment located abroad, if those earnings amount to 10 percent or less of the total investment.

“The Republican vision for the tax plan was to make the United States a more competitive place to do business. Supporters contend that the new rules do not encourage companies to locate overseas. Rather, they say, slashing the corporate rate will make it more attractive to set up shop at home, since many other advanced economies now have higher taxes.
“And manufacturers do not simply follow their accountants’ advice. They consider taxes, but they also look at an array of other factors, including the local talent pool and transportation network, when deciding where to build a new plant.

“Before the tax overhaul, companies had to pay the standard corporate tax on the money they earned abroad, with a top rate of 35 percent, but only when they brought that income back into the United States.

“Many corporations responded by keeping their profits abroad indefinitely. A record $2.6 trillion was in offshore accounts as of 2015, according to the Joint Committee on Taxation, a congressional panel. Republicans argued that the system deprived the American economy of investments that could have financed new ventures and hiring at home.

“It also meant that many multinationals effectively paid no American tax on their overseas earnings. The new bill, supporters point out, will prevent that from happening on such a large scale in the future…

“To prevent an exodus of businesses from the United States, the law establishes a minimum tax rate of 10.5 percent every year.

“Companies will get credit for up to 80 percent of the taxes they pay to foreign governments. But if the total still comes to less than 10.5 percent of the income they earn abroad, they have to make up the difference with a check to the American government.

“So while companies will now have to pay some tax in most cases, wherever they operate, they will pay much less on what they make abroad than at home.

“‘Having such a low rate on foreign income is outrageous,’ said Stephen E. Shay, a senior lecturer at Harvard Law School and a Treasury Department official during the Reagan and Obama administrations. ‘It creates terrible incentives.’

“Mr. Shay said the new rule could make a big difference for small and medium-size companies, which make up a vast majority of American businesses. When those companies used to ask him whether to open offices abroad, he advised against it if they needed to bring their cash home.” New York Times, January 8th. As Donald Trump decries the increase in his personal income tax rate, he remains dead silent about the massive corporate benefits his own companies will enjoy under the new law… all the while he maintains the secrecy of all of his relevant tax returns.

I’m Peter Dekom, and it so easy to fool not just your most ardent “I want to believe” followers but even purportedly sophisticated members of Congress by simply making tax law quickly and is way-too-complex for them to comprehend.

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