General Motors’ decision last week to stop production at five plants in North America and lay off 15 percent of its salaried workforce has renewed partisan debate over whether the Republican tax law passed last fall encourages companies to ship their jobs overseas.
Sen. Sherrod Brown (D-Ohio), widely viewed as a 2020 presidential contender, argued on Twitter that the GOP tax law encourages GM to outsource and that “no one in Washington should be surprised.” Congressional Republicans denied that was the case, saying that nothing in their legislation promotes moving jobs overseas.
“It’s purely a partisan attack to blame GM’s decision on the new tax law,” said Nicole Hager, a spokeswoman for Sen. Orrin G. Hatch (R-Utah), one of the law’s lead architects. “We’re already seeing tax reform work: Multinational companies are bringing home jobs and investment.”
The political crossfire over the car company’s announcement may not be surprising, but it comes amid a broader debate among economists, academics and tax experts over the extent to which President Trump’s signature tax law more broadly encourages U.S. companies to outsource.
Most experts interviewed by The Washington Post said it is impossible to know precisely what motivated GM’s layoffs without firsthand knowledge of the company’s motivations, noting that an array of factors was probably involved in the decision.
GM executives have said the changes reflect their push to focus on self-driving cars, electric vehicles and more-efficient trucks, crossovers and SUVs. The New York Times has noted that the downsizing comes amid a decline in consumer interest in smaller and midsize cars. A spokeswoman for the company did not return a request for comment about the GOP tax law’s impact on GM’s decision.
The 2017 Republican tax law transformed how the U.S. tax code applies to multinational corporations and their subsidiaries, slashing the tax burdens companies face on both their national and their foreign earnings. To conservative economists, and even some liberals who opposed the law overall, these changes have in fact reduced the incentives to outsource.
These experts said the status quo before the tax overhaul included its own incentives that promoted outsourcing and noted that the law slashed the U.S. corporate tax rate from 35 percent to 21 percent — which should encourage more, not less, domestic investment.
But other left-leaning and some nonpartisan economists defended Brown’s assertion, pointing to the law’s dramatic cuts in the amount of U.S. taxes paid by multinational firms on their foreign subsidiaries. To these experts, the Republican tax law created an enormous new incentive to look offshore by lowering the taxable income of companies with more assets overseas. These critics also noted that, beyond exempting much of these companies’ foreign earnings from taxes, the law created a new tax rate on foreign income that’s only half that paid domestically — a “50 percent off coupon,” as Brown has termed it.
The debate has big implications for U.S. politics as well as the global economy, as companies try to assess how the approximately year-old GOP law affects their overall financial incentives, according to tax experts.
Before the tax law, U.S. companies’ overseas earnings were, at least in theory, taxed at 35 percent — the same rate they were taxed domestically. This practice of charging the same tax on domestic and international earnings is called a “worldwide tax system.”
Conservatives argued this structure encouraged American firms to move their headquarters abroad, since many other developed nations do not impose this double tax on both domestic and foreign earnings. They also said it led many firms to indefinitely postpone bringing their earnings back home, since they could avoid the double tax by keeping their money outside the United States.
“There are many criticisms one could legitimately level at the tax law, but I don’t think it’s a really generally held view, even among Democrats, that it strengthened overall company incentives to move offshore,” said Alan Auerbach, an economist at the University of California at Berkeley who specializes in tax issues.
The GOP tax law shifted the United States to a “territorial tax system,” which exempts most companies' foreign earnings from U.S. taxes. But the new system is also subject to criticism from those who say it promotes outsourcing.
In 2014, the average rate that American companies paid to those foreign countries where they were operating was between 10.5 percent and 15 percent, lower than the current U.S. corporate tax rate of 21 percent, said Stephen Shay, a former international tax official at the Treasury Department who now teaches at Harvard University. That means, for U.S. companies, earnings on domestic profits are taxed at a significantly higher rate than earnings on foreign profits — which critics say is a clear incentive to outsource.
The GOP tax law also included a complicated new rule to try to prevent companies from gaming the new system to secure lower taxes. This new rule includes a provision that says companies can escape U.S. corporate taxes if their foreign earnings are smaller than 10 percent of their “tangible” foreign assets. The provision is intended to stop companies from artificially shifting their money overseas. But skeptics say it could backfire in a big way, because companies can lower their taxable income by increasing the amount of production they do outside the United States. In other words, according to critics, it’s a direct financial incentive to outsource.
“These multinational firms are going to want to stay below the 10 percent threshold, because that means the U.S. tax system won’t touch their foreign earnings,” said Matt Gardner, a tax expert at the Institute on Taxation and Economic Policy, a left-leaning think tank. “If you move a whole factory overseas, that sharply increases what they can earn without paying U.S. taxes.”
Shay said that Brown may be understating the extent to which the GOP tax law encourages companies to outsource. U.S. companies have proved to be very good at preventing foreign countries from increasing taxes on their subsidiaries, Shay said.
Still, other economists caution that it’s hard to imagine that these new incentives already explain corporate behavior such as GM’s. The Internal Revenue Service and Treasury Department, for instance, are still determining the exact parameters of the tax law’s international provisions. Ernie Tedeschi, an economist in President Barack Obama’s Treasury Department, said the Trump administration’s other economic policies, such as his imposition of tariffs, were more likely to have affected GM’s decision.
“If GM’s decision had anything to do with U.S. tax policy, it’s much more likely it was the tariffs influencing it,” Tedeschi said.
Brown, who has been more supportive of some tariffs than other lawmakers, questioned that assertion. “The math simply doesn’t add up. GM has spent $10 billion on stock buy backs since 2015,” said Brown spokeswoman Jennifer Donohue. "That’s ten times what the tariffs supposedly cost them.”