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This blog post is part of a series dedicated to analyzing the impact of the Tax Cuts and Jobs Act. Click here to see all of the blogs in the #TCJANowWhat series.
As a lawyer and noneconomist, I approach the topic with a different twist from that of my fellow bloggers — one that reflects my focus on global tax developments. In particular, I’m interested in looking at why and how the Tax Cuts and Jobs Act’s (TCJA) outcomes appear to deviate from the objectives of those who were instrumental in its design and conception. In analyzing the TCJA’s impact, it’s also important to consider the role global tax developments played in influencing US legislative goals and how the law might affect future global developments. US tax law changes tend to have ripple effects worldwide.
Although the TCJA was passed in a largely partisan process, there was broad bipartisan consensus in the international tax policy proposals floated in the decade leading up to enactment of the TCJA — including those embedded in the Obama administration budgets — as to the goals of international tax reform. These widely agreed-on objectives included lowering the corporate tax rate to achieve greater parity with the rates of most of our major trading partners, adopting some variation on a territorial system also to achieve greater parity with other countries (the US being the only major economy attempting to tax companies’ worldwide income), ending the incentives for US corporations to keep their foreign earnings (even if not their actual cash) overseas, and enacting anti–base erosion measures to prevent US companies from shifting profits from high-tax to low-tax jurisdictions, including both from the US to other countries, and among other foreign countries.
The TCJA enacted a number of provisions that at least nominally should have achieved these goals. It reduced the corporate rate significantly. It adopted a 100 percent dividends received deduction on foreign distributions. It also enacted anti–base erosion provisions in the form of a vastly expanded subpart F regime and a tax on outbound base-eroding payments.
But few give TCJA high marks, with critics on the left arguing that it gave away the store with little benefit and objections from the corporate world that the regime as a whole fails to deliver its promised benefits because of the penalties and complexity associated with the anti–base eroding provisions and the limitations on territoriality. Conservative thinkers, meanwhile, argue that the act accomplished its goals at the cost of inordinately increasing the federal budget deficit and that the uncertainty it created means that it will fail to produce the economic stimulus desired.
Why did the results deviate so far from their objectives? Is it that the goals were misconceived or that they became diluted in the political process? Either way, the gap between policymakers’ objectives and the resulting legislative outcome suggests that policymakers, in developing tax proposals, need to be thinking more deeply about the process in which theoretical ideas are translated into legislation.
Another aspect of the TCJA that generally receives short shrift is the extent to which global tax trends influenced its provisions. If one views the TCJA measures that are universally condemned as bad policy (such as the pass-through deduction) as political compromises needed to achieve successful passage of international reform and international reform as an imperative to reset the US system in response to global changes, the oddities in the TCJA make more sense. That doesn’t diminish from the harmful results of poorly drafted provisions, but it does help reflect on the need for, and shape of, future changes.
On the flip side, discussing the TCJA’s economic impact purely in domestic terms fails to acknowledge the significant impact it has had, and will continue to have, on the global tax policy debate. US enactment of the global intangible low-taxed income tax and the base erosion anti-abuse tax — even if they are poorly designed provisions — has already shifted the global conversation toward acceptance of minimum taxes and other anti–base erosion measures. Like in the domestic sphere, the full impact of the TCJA on the global tax system can’t yet be fully known. But it seems likely that it will have a leveling effect on the global corporate tax base. Although the immediate effect may be reduced US tax revenues, the long-term impact may be the protection of a global corporate tax base.
Mindy Herzfeld is a professor of tax law at the University of Florida Levin College of Law and of counsel at Ivins, Phillips & Barker, Chtd.
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In analyzing the TCJA’s impact, it’s important to consider the role global tax developments played in US legislation and future global developments.
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