Here’s a thought—economists suggest new corporate tax cuts won’t spur significant wage growth or capital investment because multinational companies were already stashing their cash in offshore tax havens.
With a hot economy and low unemployment, not too many people feel the need to question what’s coming next. It’s good right now, so there’s no reason to think tax cuts won’t do what they are supposed to—encourage companies to build and hire big in the US.
But it just may not be so. Dialogue continues around stagnant wage growth and many companies have, so far, used the tax drop to buy back their own stock, rather than expand physical infrastructure.
A recently released research paper suggests that the tax cuts can always help business, but the booming business of sheltering profits in tax havens may steal some of the thunder—and economic fuel—from recent tax cuts.
A Reuters article discusses the dilemma. Essentially, tax cuts on multinational companies are intended to stop these big earners from shifting profits to foreign subsidiaries. Less tax at home means more money to spend on building out American operations. But instead, current tax practices, coupled with the new tax cuts, mean those amplified profits are flowing into offshore tax havens instead. In fact, researchers suggest that as much as “40 percent of multinational profits are shifted to tax havens each year.”
How does that work?
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These study authors used a new type of economic model that involves “foreign affiliate statistics,” or FATS to model how much profit large multinational companies are dropping into offshore tax shelters. No matter how low the tax rate is in the US, for example, it can’t beat Bermuda which has a whopping tax rate of exactly zero percent. In 2016, Alphabet took advantage, reporting $19.2 billion in revenue—in Bermuda. Google, on the other hand, enjoys tax savings through sweetheart tax deals in Ireland.
The bottom-line suggests that tax cuts add to the amount of profit American multinational companies are able to relocate in low to no-tax offshore shelters, reaping even more corporate benefit while reducing tax revenue to the US, the EU, and elsewhere. While some of that profit returns to the US, recent tough talk on tariffs may be all that is needed to keep revenues safely located in tax havens, rather than offered as take-home pay or capital investments on American soil.
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