Tax, Trade, & Investment: Examining Tax Reform




WITA hosted a distinguished panel to discuss President Trump’s recently passed Tax Cuts and Jobs Act (TCJA) and its implications for international trade and investment. The panelists included tax and economic experts, Gail F. Fosler, Dan Mitchell, and Rob Shapiro, with moderator Ed McClellan. For more information on the event and information on the speakers, visit the events page here.

Tax, Trade, & Investment: Examining Tax Reform

By: Mia Rudd & Sydney Riley

The discussion was guided by Ed McClellan, a Partner at Covington & Burling, LLP and former Tax Counsel on the U.S. Senate Finance Committee. As an experienced tax policy analyst, he provided background on the new tax provisions, detailing implications for domestic and international business. Prior to the law’s implementation, the U.S. had the highest corporate tax rate among developed economies. The TCJA cut the corporate rate dramatically and permanently from 35 to 21%, one of the few provisions that doesn’t expire. There is an immediate 100% expensing for certain assets and limits on interest deduction to 30% of cash flows. Future net operating losses is limited to 80% of taxable income and there is a future amortization of research and experimentation expenditures. Regarding international provisions, McClellan noted the U.S. is one of six OECD countries with an old tax system that taxes every dollar of American corporations’ profits overseas. Companies are thus resistant to bring money back to the States, creating a “lockout effect.”

Gail Fosler, who serves as President of the Gail Fosler Group LLC and was formerly Deputy Staff Director and Chief Economist of the U.S. Senate Budget Committee, was first to speak following McClellan’s opening remarks. An advocate of the tax act, she’s hopeful it will be transformative for the American economy. While Fosler commented on the lack of instant gratification, she notes that the promise of success instead is administrated from the incentive structures that will take years to result in beneficial location and investment decisions. She believes it is one of the most important laws to improve trade policies around the world and will likely reduce trade tensions within the Trump administration. Noting that more than 75% of U.S. corporations generate two million or less in revenue annually, the TCJA gives these companies lines of slight to a much lower tax rate. Despite Fosler’s preference for the new tax provisions, she admits the bill has technical flaws, seeing that no provisions will take place in the immediate form.

Dan Mitchell, Co-Founder of the International Liberty Blog and former economist for Senator Bob Packwood and the Senate Finance Committee, provided a libertarian perspective on the act. He thinks people are misled by the true impact of the bill and sees minimal future benefit for business. Although the economy will experience nine years of tax cuts, revenue increases begin in year ten, suggesting the new provisions fail to reduce the aggregate tax rate. Using raw estimates, he guesses the U.S. was 60% worldwide before the act, but has since shifted to a 60% territorial system. The new territorial system exempts multinationals from paying taxes on profits earned abroad. Mitchell also compared direct and indirect investment, highlighting the significance of indirect investment flows over relatively smaller direct investment flows from multinationals. Over-taxation of the government was Mitchell’s major concern, believing it will lead to excess spending without the presence of constraints. He predicts the 14% reduction in the U.S. corporate tax rate will pressure international governments to cut taxes.

Rob Shapiro, Founder of Sonecon and former Under Secretary of Commerce for Economic Affairs, was last to speak, expressing his opposition to the tax law. He sees the negative impact on investment outweighing any benefits of the act, suggesting overall effects are marginal. Shapiro believes the new system is hybrid territorial because relative tax rates play only a limited role in the location of company investment. He favors true and full territoriality, but sees no benefit to a hybrid system. One of his major oppositions to the act are the new penalties for companies heavily reliant on intellectual property, which slows innovation – one of the main U.S. trade advantages.

WITA’s panel successfully and comprehensively reviewed Trump’s Tax Cuts and Jobs Act from all sides of the political spectrum. The event clarified both domestic and international implications of the new act’s provisions and how these provisions impact Washington’s trade community.