Raising Taxes on Foreign Operations Would Cost Jobs at Home

Increased sales in foreign markets yields more jobs at home

Key Takeaways

● The Biden Administration has proposed to levy an additional tax on American companies if they pay a rate of tax less than 26.25% in any foreign country.

● The U.S. is already the only country in the world that imposes a minimum tax on the foreign operations of its companies, known as GILTI. The President’s proposal would greatly increase this minimum tax, putting American companies and their American workers at an even greater competitive disadvantage relative to foreign competitors who are not subject to similar taxes on their operations.

● The success of American companies in foreign markets contributes to jobs at home. Higher U.S. taxes on the foreign income of American companies would make it even more difficult for American companies and American workers to compete and win in global markets.

● The U.S. should not increase the tax rate on GILTI until other advanced economies actually adopt global minimum taxes on the foreign earnings of their companies. Acting alone without the adoption of global minimum taxes by other countries would jeopardize our economic recovery and harm American workers while benefiting the foreign rivals of American companies.

Executive Summary

President Biden has called for the GILTI tax rate to be doubled — applying to any foreign income taxed at a rate below 26.25% and making other changes that would increase the U.S. tax burden on the foreign operations of American companies.

These proposals would make it harder for U.S. companies to compete and win in foreign markets — markets that serve 95% of the world’s population — and would result in fewer jobs at home. When American companies succeed in foreign markets, their success increases demand for the goods and services their workers produce at home.

Further increasing U.S. taxes on the foreign operations of American companies would result in an even more unlevel global tax playing field — making American companies less competitive, reducing their sales abroad and their jobs at home.

The Biden Administration has also proposed that other countries adopt their own minimum taxes, at a rate no lower than 15%. While a global minimum tax adopted by all advanced economies at the same rate as in the U.S. could in theory establish a level playing field for American companies, the U.S. should not increase the tax rate on GILTI until other advanced economies actually adopt global minimum taxes on the foreign earnings of their companies. It is important to note, especially given comments from countries such as China and Ireland, it is not at all clear that other countries will choose to enact such a tax at a rate as high as 15% — let alone at the 26.25% rate proposed by the Biden Administration to apply to U.S. companies.

Acting alone without the adoption of global minimum taxes by other countries would jeopardize the U.S. economic recovery and harm American workers while benefiting the foreign rivals of American companies.

In-Depth: The Connection Between Foreign Operations and American Strength

Foreign Operations Support Jobs in the U.S.

With 95% of the world’s population and 75% of the world’s purchasing power outside the U.S., American companies need to compete and win overseas. The success of U.S. companies in foreign markets increases the demand for the goods and services their workers produce at home. In 2018, U.S. exports of manufactured products and other goods by U.S. multinational companies to their foreign affiliates and other foreign customers totaled $834 billion.

The foreign operations of U.S. companies overwhelmingly serve customers in foreign markets. Approximately 90% of all sales of these operations are to foreign customers. U.S. companies often use foreign affiliates to do some manufacturing or assembly of products that are too costly or large to transport over long distances, or that must ultimately be installed at customer sites in foreign jurisdictions, but which rely on U.S. exported components. Foreign affiliates will also service U.S.-manufactured goods at the site of the foreign customer. For example, American-made aircraft engines power airlines around the world but are serviced close to the foreign customers’ location to avoid delays in returning to operation. Those services in turn support greater exports. Increased sales of American products in foreign markets also support greater R&D spending in the U.S. — spending that results in many high-paying U.S. jobs in research and development.

Researchers at Harvard Business School and the University of Michigan confirm the strong relationship between a company’s growth in foreign markets and its growth at home.¹ When U.S. companies expand their operations outside the United States, they hire more people at home, pay higher wages to their U.S. workers, and invest more in property, plant and equipment in the United States.

Increasing taxes on the foreign operations of U.S. companies — particularly when no other advanced economy imposes a similar tax on the foreign operations of their companies — would make it even more difficult for American companies to succeed abroad and would hurt job creation and wage growth at home.

Increasing Minimum Tax Rates on Foreign Operations of U.S. Companies Would Reduce American Influence Abroad and Lead to More Inversions and Foreign Takeovers of U.S. Companies

All Americans benefit from having strong, multinational companies headquartered in the United States. In addition to creating more jobs and high wages here at home, the success of these businesses in global markets helps spread American values worldwide and enhances our position on the world stage. Other countries, notably China, have aggressively pursued strategies to help their companies succeed abroad as a means of expanding their influence in foreign markets. In this environment, the U.S. can ill afford a self-inflicted wound that would diminish our country’s ability to promote American values.

Before the 2017 tax reform, inversions — transactions in which a U.S. company merged with a foreign company incorporated in a country with a more competitive tax system — were becoming increasingly common, affecting communities and workers in every state.² In 2017, the Congressional Budget Office identified planned inversion transactions of $319 billion in 2014, a sum greater than all inversion transactions completed in the prior 30 years.³ Altogether, between inversions and outright acquisitions of U.S. companies by foreign companies, U.S. assets were migrating to foreign owners who benefit from more favorable tax treatment on their foreign income.⁴

President Biden’s proposed GILTI tax increase would “likely reignite corporate inversions,” according to an analysis by the Tax Policy Center, a joint venture of the Brookings Institution and Urban Institute.

The U.S. Should Not Increase its Global Minimum Tax until Other Countries Adopt Similar Measures

At the same time the Biden Administration is seeking to increase the GILTI tax rate on the foreign income of American companies up to 26.25%, it has proposed at the OECD that other countries adopt global minimum taxes to apply to their multinational companies at a rate of at least 15%.

But until other countries actually adopt minimum taxes of their own, through action by their parliaments and legislatures, the U.S. should not increase the GILTI tax rate to avoid further disadvantaging American companies. In the almost four years since the U.S. enacted GILTI, not a single foreign country has followed suit. Even if a consensus on a global minimum tax can be reached at the OECD, it is not at all clear that it would be at a rate as high as 15%. Ireland, for one, has strongly defended its sovereign right to set its 12.5% tax rate and EU law would prevent other EU countries from imposing an additional tax without unanimous agreement of all EU countries. Moreover, there is no reason to believe that countries like China and Russia would impose a global minimum tax on their companies.⁵

Even if contrary to experience, other countries actually enacted global minimum taxes, a U.S. GILTI rate higher than that of other countries would by definition put American companies at a competitive disadvantage. The Administration’s proposal would result in additional U.S. tax on any U.S. operations in countries where they were paying tax at less than a 26.25% tax rate — significantly higher than the 12.5% global minimum tax rate that the EU could potentially consider.

The U.S. should not increase the tax rate on GILTI until other advanced economies actually adopt global minimum taxes on the foreign earnings of their companies. Acting alone, without the adoption of global minimum taxes by other countries, would jeopardize the U.S. economic recovery and harm American workers while benefiting the foreign rivals of American companies.

Further Reading

Mihir A. Desai, C. Fritz Foley Hines, and James R. Hines, Jr. “Domestic Effects of the Foreign Activities of U.S. Multinationals.” Am. Econ. J. :Econ. Pol’y 1, no. 1 (2009): 181–203.

Congressional Budget Office. “An Analysis of Corporate Inversions,” September 2017.

Sources Cited

https://www.cbo.gov/system/files/115th-congress-2017-2018/reports/53093-inversions.pdf

[1] https://repository.law.umich.edu/articles/1453/

[2] See, for example, Kate Linebaugh and Liz Hoffman, “Tax-fueled Trend in Cross Border Deals,” Wall Street Journal, May 12, 2014; Hester Plumridge and Peter Loftus, “Inversion Frenzy Rocks Drug Sector,” Wall Street Journal, June 21, 2014; Dana Mattioli, “Acquirers Plot Escape from a Turn on Taxes,” Wall Street Journal, July 7, 2014; Liz Hoffman and Hester Plumridge, “Race to Cut Taxes Fuels Urge To Merge,” Wall Street Journal, July 15, 2014; Tom Fairless and Shayndi Raice, “In Inversion Deals, U.K. Is a Winner; Location, Language, Lifestyle Are Draws as U.S. Companies Buy Firms Abroad,” Wall Street Journal, July 28, 2014; Emily Chasan, “Companies are Running the Numbers on Potential Tax Inversions,” Wall Street Journal, August 26, 2014. Roberto A. Ferdman, “We finally have an idea of how much money Burger King will save by moving to Canada,” Washington Post, December 11, 2014.

[3] https://www.cbo.gov/system/files/115th-congress-2017-2018/reports/53093-inversions.pdf

[4] “Insights on Trends in U.S. Cross-Border M&A Transactions after the Tax Cuts and Jobs Act,” Tax Notes International, October 26, 2020.

[5] https://www.nbcnews.com/business/economy/yellen-pushes-corporate-tax-floor-among-g20-countries-create-more-n1263090

The Alliance for Competitive Taxation promotes U.S. jobs, investment and rising incomes through the establishment of a competitive U.S. tax system.