Designing international tax reform: lessons from TCJA

Abstract

The Tax Cuts & Jobs Act (TCJA) introduced the most significant changes to the US international tax system in decades. The law changes have been criticized for reducing equity, benefiting wealthier business owners at the expense of individuals in the long term (while also increasing the deficit) adding to complexity, and creating incentives for shifting profits and activities offshore. These critiques give rise to the question of how best, and under what criteria, to evaluate the changes to the international tax system brought about by the US tax reform. This paper analyzes the tax law changes adopted in the TCJA that impact cross-border investment within the context of several decades of policy proposals that recognized the flaws and deficiencies of the prior system and attempted to develop proposals that balanced creating incentives for the efficient use of capital and the benefits of US investment overseas while minimizing incentives for profit shifting. Reviewing the various provisions of the law in the context of a series of reform proposals made over the previous decade shows the extent to which most of the international law changes introduced by the TCJA closely followed these well-developed ideas. And yet, there appears to be a disconnect between the goals of the law change and the extent to which the laws as enacted have effectuated that change. The divergence provides a cautionary tale for public finance economists wishing to engage in international tax regime change.

The Effect of Tax Rate Change on Inversions by Multinational Enterprises in the United States

“…Herzfeld (2021) examined the effect of the TCJA on MNC's trade and investment, since the pre-TCJA facilitated investment in low taxed foreign countries as well as general tax base erosion, with the intention of reducing the shifting of investments from the US. However, the change in the international tax area is more challenging than it appears with the large gap between the anticipated bene t of the TCJA and reality revealing that incremental changes are better than major ones and the need for details in the revised law as well as the interaction between pre and post TCJA (Herzfeld, 2021). Consequently, there was a need to examine the effect of updated tax legislation on income reporting by MNEs.…”

The pattern of foreign direct investment in the late 2010s and early 2020s: under international externalities

“…As a result, quality investment capital is increased in the heart of the United States, contributing to building a strong domestic US economy. Although there is debate about the effectiveness of TCJA (e.g., reducing equity, increasing benefits for wealthy business owners, and increasing incentives to move profits and operations abroad, (Herzfeld, 2021); however, there is evidence that FDI inflows are returning to the United States as well as reducing the rate of foreign investment of American companies. "Made in the USA", tax incentives and high-quality labor were the factors that attract US reshoring companies as well as FDI inflows into the US.…”