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Opinion | A Better Corporate Tax for America

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When Congress enacted the Tax Cut and Jobs Act of 2017, the result was a dramatic reduction in corporate tax revenue. Over the past three years, corporate tax collections have fallen to their lowest level since World War II: 1% of gross domestic product. Many of the country's largest companies paid no federal income taxes in 2020.

Proponents of the TCJA said the U.S. would get something in return for these tax cuts. Lower rates, the argument went, would lure production and investment to our shores, but that hasn't happened—and for an obvious reason: Other countries see what we're doing and respond. When they see us lower our rates, they lower theirs to undercut us. In the end, no nation ends up more competitive. The result is a global race to the bottom: Who can lower their corporate rate further and faster?

The TCJA not only perpetuated this race to the bottom; it also put America at a disadvantage. The law creates an incentive for U.S. companies to offshore their workers and investments—and to shift their profits to tax havens. One reason is the minimum tax on the foreign profits of American multinational corporations. In theory, a minimum tax should stop the flow of business out of a country because firms know they'll be taxed no matter where they go; they can't game the system. But the TCJA's minimum tax was poorly designed.

If you're a U.S. firm that does business abroad, the TCJA essentially gives you an easy—but perverse—choice: You can move your foreign profits and operations to America, where the corporate tax rate is 21%, or you can keep them anywhere else in the world, where the U.S. will charge you around half that. It's not a hard call, especially because the minimum tax is calculated based on a firm's total global profits rather than looking at what the company earns in each different country. With no one looking at individual jurisdictions, corporations can shift and book profits wherever they can get the lowest tax bill. The TCJA also makes the first 10% of returns earned by foreign assets tax exempt, a powerful incentive for companies to offshore factories and jobs. It isn't an overstatement to say that today most firms would prefer to earn income anywhere but America.

The U.S. isn't the only loser in this race to the bottom. So are our corporations. The global competition for low rates allows American firms to pay less taxes—or none at all—but they still pay a significant cost. Over the next 10 years, more than $2 trillion of the U.S. corporate tax base will flow out of the country because of the broken system I've described. Our tax revenues are already at their lowest level in generations, and as they continue to drop, the country will have less money to invest in airports, roads, bridges, broadband, job training, and research and development.

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