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This article provides a useful historical context and novel simulation of the effects of FDII and GILTI on the business cycle. It includes an interesting comparison of FDII to DPD and raises important questions about the method and policy implications. The article also discusses the consequences of TCJA, specifically GILTI, highlighting the little efficiency gain from repatriation and the harmful effects on real investment incentives. The author explores various policy questions and offers insights into what more ideal policies could look like.
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Dowd and Landefeld FDII in Historical Perspective • Useful context • Novel, difficult simulation of FDII’s effects • Interesting emphasis on business cycle • Useful comparison of DPD • Some questions about method. • Some thoughts about policy.
Business Cycle Effects • Key point: excess profits are procyclical. • Export test should (and does) work against this. • But, overall, FDII income is procyclical; average tax rates rise during downturns. • This is underappreciated. And, undesirable. • Larger context of automatic stabilization • Lower corporate rate works against stabilization. • 100% expensing => one less tool in the shed. • Carryback of NOLs not available. • Larger context of revenue losing “reform” => the next recession is more difficult to respond to!
Comparison to DPD • Mostly, the same companies benefit. • The instruments are similar in size. • JCT cost is $64 b over ten years, none in first few years. • Simulation makes FDII similar to revenue cost of DPD.
Questions • A good starting point. • Is prior law the best baseline? • There are key interactions here as well, including the lower rate, GILTI, BEAT, expense allocation, etc. • Imputation procedure comes with limits. • Are Table 2 results due to construction? • Does the method make all the largest companies exporters? • Construction of exporters difficult. .
Policy Questions • What is this provision trying to achieve? • Does it make sense to tax-prefer excess profits? • Does the location of excess income have economic meaning? (Beyond revenue?) • Why should companies settle for 13%? (Or 16%?) • The provision may worsen competitiveness. • Discourages US assets. • WTO uncertainty undermines trading system. • Uncertainty is a big deal. • Competitiveness has many facets. • Surely there are better ways to reach the objective.
Dharmapala Consequences of TCJA, and in particular, GILTI • Little efficiency gain from repatriation. • Move from one hybrid system to another need not benefit US MNCs. • Useful emphasis on uncertainty. • Useful discussion of distortions to real investment. • Some questions about method. • Some thoughts about policy.
Are there big efficiency gains from TCJA? Dharmapala says no; I agree. • Repatriation should not help unless firms are credit constrained. Dharmapala Foley Forbes provide evidence. • We are really moving from one hybrid system to another. • Prior system was not truly worldwide. • Lost revenue in attempt to tax foreign income. • Current system taxes GILTI currently. • Will revenue benefit accrue to other foreign (higher-tax) governments? • America last tax policy? • Most mobile US MNCs could be worse off. • Complications only add to this judgment.
Harmful Effects on Real Investment Incentives • New incentives to Offshore Assets • FDII also lowers incentive for U.S. Assets • Real responses are less than financial, but still. • IP Mobility : Is this real or financial? • Other Negative effects • Uncertainty • Harm to trading system • Inadequate government funding • Harder to respond to recessions
Questions • Is it the case that firms that don’t repatriate in 2005 expect to pay the 35% rate eventually? Arguably, no. • Is Y/A of 65 percent reasonable? Arguably, no. • These affect the comparisons in the papersoinclude caveats and more calculations. • Yet, result passes sniff test. If foreign tax rate is less than 6.8 percent, GILTI has a higher burden. • Real and financial issues could be usefully disentangled. The latter have far larger elasticities. .
Policy Questions The author really values CON. Why? • Burden on residence. How important is this? • Some evidence of distortion to M&A activity. • Liu also finds more investment in low tax countries post UK territorial move. That too has consequences. We also have the competing problem of profit shifting and corporate tax base erosion. • Essential tradeoff here. • Profit shifting is large and non-linear. • Financial data miss most of problem. See DL, Clausing. • We agree that it won’t be helped by TCJA.
What would more ideal policy look like? • I’m looking forward to the conclusion. • Pure territorial?? • What about diverted profits tax and and other hybrids? • True destination system? • DBCFT? • Sales-based FA? • True residence? Is this more feasible with a lower rate?
