Below the analysis from Brad Setser, who is known for his meticulous knowledge and analysis of international data. Here is what the reform promised:
“Trillions of dollars in trapped profits will return to the United States… We expect that it could be — the number started out at about $2.5 trillion; we think it’s going to be close to $5 trillion,” he [Trump] said, speaking to business leaders. “Over $4 [trillion], but close to $5 trillion, will be brought back into our country. This is money that would never, ever be seen again by the workers and the people of our country.” (Source)
But wait, there were more bombastic promises: “With a lower tax rate, U.S. firms will no longer have an incentive to offshore” said Kevin Hassett (Trump’s Chair of the Council of Economic Advisors): “There is also a literature that looks at the relationship between tax rates and transfer pricing. That literature implies that a corporate tax cut to 20 percent would dramatically reduce the trade deficit and increase GDP accordingly.”
And finally, The Trump White House: “The tax cuts will make America a more competitive location for manufacturing.” “American manufacturers are optimistic like never before, because President Trump’s tax cuts and relief make them more competitive.”
All three arguments come up short when compared to the data. It is not true, as Setser shows that “With the tax reform, there is no longer a tax incentive to maintain the whole “offshore” profit charade… What has happened? Some money has moved back (as one would expect), but not all that much and as of the first quarter [of 2019] firms returned to “reinvesting” a portion of their offshore profit back abroad. The cumulative sum of “reinvested earnings” is rising again.”
Given all the rhetoric about the cost to the United States of all these trapped profits, the reality that only a small amount, on net, has come back to the United States should be a bit sobering. It turns out that most firms weren’t all that inconvenienced by their large offshore cash balances. Those that really wanted to do a buyback could borrow against their offshore profits. Those that wanted to wait until the tax code changed before doing a buyback could do that too, as the market expected that the bulk of the cash would eventually be returned to shareholders.
Technically speaking, about $248 billion of formerly offshore profit was returned (That is the sum of the “negative” numbers on reinvested earnings, and sum consistent with the findings of the Wall Street Journal, which found a roughly $300 billion drop in the overall cash balance of U.S. firms in 2019)… Substantively, what really matters is whether the new tax code got rid of the incentive for firms to “offshore” a large portion of their profits. And the answer is clear. It didn’t.
The amount of profit that American firms report in the world’s low tax jurisdictions is the strongest single bit of evidence that the current process of globalization needs to be reformed. U.S. firms report to earn about 1.5 pp of U.S. GDP in Ireland, the Netherlands, Switzerland, Singapore, and a bunch of really small Caribbean islands. That is far more income than U.S. firms report in large market countries like Germany, France, Italy, China, Japan, India, and Mexico. Clearly something is going on (the countries in Europe are well aware of this, the non-taxation of the profits U.S. tech firms earn in Europe has long vexed them).
The data on the global distribution of U.S. FDI tells the same story—the majority of FDI by value is now claims on those same low tax jurisdictions (Don’t trust me? Look at table 1 of the BEA’s release on U.S. direct investment abroad and the IRS data on what kind of profits U.S. firms report and what kind of tax they pay in different jurisdictions). What happened after tax reform? The profit U.S. firms report in these low tax jurisdictions went up.
