Dhammika Dharmapala on the Consequences of the Tax Cuts and Jobs Act’s International Provisions

The consequences of the Tax Cuts and Jobs Act’s international provisions: The early empirical evidence

The Tax Cuts and Jobs Act (TCJA) fundamentally transformed the US system of international taxation. In a recent paper, I discuss the potential consequences of these new international provisions, using the prior academic literature on related issues to draw initial inferences about their impact. That discussion is extended here to incorporate some early empirical evidence that is now beginning to emerge.

Among the most prominent international provisions of the TCJA is the abolition of the tax imposed upon the repatriation of income from foreign affiliates to their US parent firms. Smolyansky, Suarez, and Tabova (2019) document a dramatic surge in repatriations in 2018. They find that these repatriations have led to a large increase in share repurchases while having little discernible impact on domestic investment. These conclusions are quite unsurprising in light of prior evidence from the repatriation tax holiday implemented in 2005.In lieu of the old repatriation tax, the TCJA imposes a novel tax on the foreign income of US-based multinational corporations (MNCs), known as the global intangible low-taxed income (GILTI) tax. GILTI refers to the income of a US MNC’s foreign affiliates in excess of a presumptive 10 percent return on tangible assets. In a recent paper, I analyze the circumstances in which US-based MNCs are likely to face greater burdens from the GILTI tax compared to the prior regime (which was ostensibly “worldwide” but deferred US taxation until repatriation). Using the observed behavior of firms during the 2005 repatriation tax holiday, this analysis concludes that the GILTI tax — and thus the TCJA as a whole — increases the US tax burden on the foreign activities of many, and perhaps most, US MNCs.

Evidence of the TCJA’s impact on US MNCs is still emerging, and the question is difficult to address until several years of data are available. However, the immediate stock market reactions to the TCJA provide some indication (with the caveat that they reflect initial investor expectations that may not be borne out in the long run). Wagner, Zeckhauser, and Ziegler (2018) find quite substantial negative market reactions for US MNCs (relative to domestic firms) during the legislative events in late 2017 that led to the enactment of the TCJA. This may be surprising to those who view the TCJA as being quintessentially pro-business. However, the TCJA — through the GILTI tax and other provisions such as the base erosion anti-abuse tax — evinces considerable hostility to cross-border business activity, notwithstanding the evidence that the global activities of US-based MNCs lead to higher wages and investment in their US operations (e.g., Desai, Foley, and Hines 2009) and that inbound foreign direct investment raises the wages of US workers (e.g., Setzler and Tintelnot 2019).

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Tax policy