In a report released August 12 by the National Association of Manufacturers, the Ernst & Young consulting firm’s economic group found that proposed changes to a section of the 2017 tax code covering revenue earned abroad could result in up to a million jobs lost and $20 billion in lost economic activity.
Previous to 2017, foreign revenue was taxed based on money repatriated to the U.S. in dividends, which companies could and did defer to avoid paying taxes. The 2017 tax reforms passed by President Trump eliminated that tax, and, to discourage offshoring, introduced the GILTI provision, a 10.5% minimum tax targeting Global Intangible Low-Taxed Income—money earned in foreign countries from “intangible assets,” or patents, copyrights, and trademarks.
In its April 2021 “Made in America Tax Plan” proposal, the Biden treasury department criticized the GILTI tax as an insufficient replacement for pre-2017 foreign tax policy.
“Although the 2017 corporate tax rate cut purported to increase the competitiveness of U.S. companies, the law’s generous treatment of corporate profits was paired with incentives for shifting profits and activities offshore,” the department said. It proposed to double the GILTI tax, eliminate a 10% deduction on tangible assets like factories built overseas, and change how the tax is assessed to a country-by-country basis instead of a territorial one.
“These proposed tax changes would reduce investments and lead to job losses in the United States, harming manufacturers and manufacturing workers,” said NAM CEO Jay Timmons.
By analyzing a series of economic studies, EY concluded that increased investment abroad more often leads to increased investment and jobs in the U.S. One study, Hufbauer, Moran, and Oldenski (2013), found a 10% increase in overseas employment at a company leads to 3%-5% increases in R&D spending, capital spending, exports, sales, and employment in the U.S.
The opposite correlation is also true, the report said. EY estimated that the proposed changes to the GILTI provision would reduce U.S. employment by 500,000-1 million jobs and domestic investment by $10 billion to $20 billion.
In some cases, the report said, U.S. corporations need foreign facilities to stay competitive. For one example, products that contain water like beverages or detergent are often transported without water to reduce weight. The product can then be rehydrated at an in-country site and distributed locally. Making it more expensive for a company selling detergent to maintain an in-country site would hurt its export business, EY says, which could also hurt jobs back in the U.S.
EY also took averages of the GILTI taxes paid by companies in different industries and estimated how the proposed changes would increase the average effective tax rate paid in each one. Companies currently pay an average effective GILTI tax rate of 16.3%, while manufacturing, one of the seven analyzed, currently pays an average effective GILTI tax rate of 13.6%. The proposed changes would increase those average effective tax rates to 24.7% and 23.6%, respectively.
In a section devoted to caveats from the study, EY noted that the proposed GILTI tax changes were analyzed in isolation, without considering other parts of Biden’s proposed tax changes like an increased corporate tax rate or potential government-funded productivity measures.
The study also noted that some segments of the population would be hurt by U.S. companies expanding more into other companies, including low-wage, low-skill U.S. workers.
“Foreign expansion allows the United States to specialize more effectively in what it does best, which may leave these workers behind,” the report says, but continued that a tax policy that would reduce U.S. multinational competitiveness abroad “is not the solution to this.”