Liberal media figures and Democratic politicians insist that the GOP’s 2017 tax reform was solely a massive handout to the wealthy. But in reality, President Trump and his Republican allies have been, through their tax bill, responsible for the biggest global crackdown on corporate tax avoidance ever.
Republicans accomplished this as part of their corporate tax reform, the same one liberal activists tell us is so terrible. You know, the one that supposedly only enriches stockholders, increases inequality, and so on.
For at least a decade, complaints have been made that Google, Microsoft, Facebook, Apple, and other big companies haven’t been paying enough taxes on their profits. Yes, they’ve paid everything they have to under the law, certainly, but that’s not enough for many critics, given the way the companies took full advantage of loopholes to (lawfully) avoid taxes by stashing cash overseas.
Companies have been using tax evasion methods such as the “double Irish with a Dutch sandwich,” a shifting of funds to Irish and Dutch subsidiaries, to exploit low-tax havens. And, well, critics have a point here. Some companies really have not been paying much in federal taxes as a result of these kinds of schemes. It’s possible to squirrel the money from sales away in some nice tax haven somewhere. This way, the funds only get taxed if they actually enter the United States.
But things should be taxed where the economic activity takes place. With most Big Tech companies, that activity is in the intellectual property, the software, the brand, the simple ability to provide the service — nearly all of which is created in the U.S. So logic dictates the profits should be taxed in the U.S. as well.
Here’s how companies avoid it. An American company licenses that intellectual property to various foreign subsidiaries. The subsidiaries pay a fee for using it, money usually untaxed as it’s a simple cost of their doing business, and in return, they have access to all that intellectual property. The trick these companies employed was simply to put that offshore company in a low-tax haven and then make them the collector of that money. It didn’t enter the U.S., so it wasn’t taxed. Huzzah! Untaxed profits!
This didn’t do a great deal of good, as the money couldn’t be paid out to stockholders without entering and thus being taxed in the U.S. But great steaming piles of untaxed cash were collected overseas, running into the trillions. This, naturally, led to calls of tax avoidance.
Then came the GOP’s corporate tax reform. Under the new law, even if American companies leave those profits outside the U.S., they still get taxed. So the whole game isn’t worth it anymore. It’s all going to get taxed in the U.S., so companies can forget about those chains of offshore companies and all the complications with Ireland, the Netherlands, and so on. Which is exactly what is happening.
As Reuters reports, Google is simply not going to bother with the elaborate “double Irish with a Dutch sandwich” scheme anymore. The cash will flow into the U.S. and be taxed, justly, here as well. It doesn’t matter how you try to finagle matters, U.S. tax will still be due and will still be paid.
This is, by a long, long way, the single biggest closing of tax-avoidance opportunities that anyone has ever managed. And it’s all been done by Trump and Republicans, whose tax reform is decried by those very same liberals who claim to be against tax avoidance. It’s funny how liberals aren’t satisfied with getting what they demanded if it comes from a Republican.
Tim Worstall (@worstall) is a contributor to the Washington Examiner’s Beltway Confidential blog. He is a senior fellow at the Adam Smith Institute. You can read all his pieces at the Continental Telegraph.
