Tax Reform is 1st and foremost on the Political Agenda. Let’s do a quick breakdown of this initiative.
First let’s separate the wheat from chaff and prioritize. Here is a prioritization list (by big issues) to use as a guide:
- Reduced temporary rate
- All Overseas Cash and Assets
- Corporate Tax rate
- Reduced permanent rate for Corporations
- Pass Through Tax
- Estate Tax
- Personal Income Tax (not materially impactful)
This is a broad outline and today we will focus on #1 and #2 as they work hand in hand.
This is a BOLD move. Currently US multinationals such as Apple, Amazon, Microsoft etc have approximately $3 TRILLION in cash sitting overseas. How did this happen, you may ask, these are US domiciled companies who enjoy the benefits and stability of being homed in the United States. Well, over the years, as these entities have increased their presence globally they have successfully also shifted their profits to other countries. Seems natural, right? Wrong, these are incentivized moves based on complex tax structuring to target low tax rate countries such as Ireland, Caribbean, etc as “Good Homes” for their profits. Thus seeing DRASTIC tax savings on the bottom line.
- 2016: $1 Billion in Taxable Income
- US Corporate Federal Tax 35% = $650,000,000 Income After Tax
- Ireland Corporate Tax 12.5% = $875,000,000 Income After Tax
- Irish Structure Tax Savings = $225,000.000
Thus it is very easy to see how well the incentivization works. Apple alone has appx. $246 Billion in cash overseas. This is a DOUBLE WHAMMY for US. Not only is this Cash savings maintained and utilized to enhance OTHER COUNTRY’S ECONOMIES, but the tax base in the US is also significantly reduced, commonly known as Base Erosion and Profit Shifting (BEPS), leaving smaller profits and thus tax revenues in the US. Tax Reform addresses this phenomena via incentivized repatriation, currently the tax rate pegged for repatriation, both which the house and the senate have settled on at this point at 14% on Cash; 7% on Assets for amounts currently held outside the US.
What this effectively enacts is a REINVERTING EFFECT for which the US benefits. We are in a Post Burger King Inversion environment, (I personally worked on the BK inversion) where Large US Multinationals have been seeking to invert to reduce their tax liability and effectively move to other countries because operating in the US creates a material tax disadvantage. In addition, the savings to have convoluted tax structures woven throughout low tax countries, benefits many things including the market value, EPS and Corporate Cash. It is real and real effective. Providing an incentivization by reducing the US Corporate tax rate by a Material and Significant amount on these overseas cash piles does 2 things:
- Increases IRS Tax Revenue by hundreds of Billions of Tax Dollars
- Makes Available Cash piles (Appx $3 Trillion) for US investment
#2 Permanent Reduction in Corporate Tax Rate:
Hand in hand with repatriation comes a permanent and reduced Corporate Income Tax Rate. This will stabilize and encourage repatriated moneys to be invested in the US economy and for the US Corporations to dismantle tax structures worldwide, I call this a REVINVERSION. As tax structures will prove in many cases to be more costly to maintain than the benefits derived, it is a natural reflexive behavior to this law change to move those profits and jobs back to the US. It is the equivalent of a water basin where repatriation effectively plugs the drain and fills the basin to the brink while lowering the tax rate permanently enlarges the basin walls so that cash brought back to US does not spill back over to other countries and we are not in same situation over time. Repatriation will be a one time surge to the IRS, reducing the tax rate to compete effectively globally will be an annuity. As tax structures REINVERT, the tax base becomes larger. The goal being, all countries with similar or higher corporate tax rates where business is NOT imperatively and intrinsically necessitated to be run via that country will be relocated back to the US.
Currently, the US is #3 highest tax rate Globally, at a 35% Federal rate (analysis disregards state rates and focuses on Federal only) which is exceeded only by UAE and Puerto Rico. Thus the US has effectively been shifting it’s Net Worth and Wealth to other countries for over 20 years. In addition to shifting Net Worth out of US, it has also created job loss. As tax structures and enforcement have created these structures to “Leap off the Page” and become less paper in nature and more economic in substance, companies have started to support these Global tax discounts by placing job force and economic investment in these countries. Apple alone makes up Ireland’s largest taxpayer and has appx. 6,000 employees. Irish Corporate tax rate: 12.5%, a full 22.5% discount from the US rate. Coincidence? I think Not.
Currently, Tax Reform is pegging the Federal Tax at approximately 20% in flux on whether the rate drop would be immediate or a 1 year deferral. Uk recently dropped its rate to compete with the Luxembourg and Ireland Tax Grabs. Fortunately, the EU has done an amazing job in the past few years shutting down Sweetheart Deals in Lux and enforcing Ireland to get in line. Apple has been remanded by the highest court in the EU and agreed to start repaying it’s Irish $15 BILLION Past Due tax bill in 2018, created by such Law defying Sweetheart deals.
Currently, the average European Corporate Tax Rate is 22.5% approximately 16% lower than the United States (Factoring in Avg State Tax pushes US all-in rate to appx. 38%). Thus you can see how our current Laws, literally are pushing US investment out of the US.
In addition, it is much more beneficial to incorporate this rate change immediately, as allowing reaction time among other countries is only to the US detriment.
The effectuation of these 2 Tax Reform changes, would NOT only return money to the US but it would keep it there as an annuity. These 2 functions hand in hand, would make any logical Multinational dismantle its tax structure and REINVERT where business purpose does not win out. You may ask, what about the cost of resources?
The wages of people capital in the US has stagnated (ie Middle Class wage stagnation) as we failed to harness the Tech industry appropriately.
We have allowed Techies to move H1B Visa foreigners in to gouge out our white collar middle class. With the immense amount of job creation that has occurred on this front along with the massive amount of cash generated you would think the last thing you would see is wage stagnation in skilled, educated labor this industry necessitates. But unfortunately NO, we allowed the founders to become immensely wealthy while gutting our middle class by Illegal and Not Fit for Purpose Visa allotments. Cost savings on these employees are between 20-50%. MASSIVE. So don’t buy the propaganda the immigration push is about field workers, I myself have been one, so I can testify to the fact Americans and WHITE Americans are willing and do perform these jobs. This was a political ploy to remove the public’s attention from Tech Lords and to play on racial stereotypes to benefit the Tech industries. H1B’s must go. MUST.
Now purely outsourcing to other countries comes with it’s own set of headaches. India, although cheap, is much more administratively and legally difficult to do business in, yet is the #1 source of H1B Visa‘s. How could such divergent data points mean that India would be the best source of skilled and exceptional workers?
Also, China’s regulations and government control make anyone think twice about allocating work and job sites, due to MASSIVE Intellectual Property concerns and government overreach.
These examples, in addition to the complexity of managing across timezones are all reasons why the reality is setting in, that sending jobs overseas is NOT as profitable as once thought.
This is PRECISELY why TAX REFORM Makes a HUGE economic difference to the US on a Corporate level. It isn’t an OPTIONAL change in LAW. The economic gains enjoyed in 2017 were largely based on the promise of the Tax Reform passing. In addition, to lever the middle class and retain the US Net Worth, it is an ABSOLUTE MUST.
USA economic viability is significantly & materially tied to Tax Reform Implementation