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The stories that matter on money and politics in the race for the White House
The writer is the Eric M Zolt professor of tax law and policy at the UCLA School of Law and served in 2021-2022 as the deputy assistant secretary for tax analysis at the US Treasury
Even beyond the election year ritual of lionising the traditional industries of Midwestern swing states, both Democrats and Republicans have become increasingly intrigued by nationalist economic policy, arguing that trade policy should prioritise domestic industrial production and manufacturing jobs.
Such policy instincts are often rooted in misdiagnosis. The jobs lost due to the infamous decade-long “China shock” were far less than a typical quarter of US job losses, and the manufacturing share of employment started its downward trajectory nearly half a century before China joined the World Trade Organization. While economic discontent is real, its sources are complex, including technological shifts, declining unionisation, rising market power and changing norms and policies. Trade disruption matters, but it is far from clear that it is a dominant force.
Still, if US policymakers are truly concerned with offshoring, they have a potentially efficient tool at their disposal: the tax code. The US tax code puts a heavy thumb on the scale in favour of foreign corporate activity. For a US multinational, foreign income is often taxed either not at all or at a rate that is half that of the US. Imagine a US multinational that earns income in a zero-tax jurisdiction abroad. The first 10 per cent return on their tangible assets is completely free of US tax, and the remainder is taxed with a 50 per cent deduction relative to US-source income. Perversely, the more tangible assets you put offshore, the less US tax you pay.
Stranger still, even foreign income from high-tax jurisdictions such as Germany and India is tax-preferred relative to income from Ohio or Wisconsin. Such income still generates tax credits that can offset the US taxes due on income from tax havens. This is an “America last” tax policy.
Luckily, there is a fix. By joining the international tax agreement (negotiated by Treasury secretary Janet Yellen and her counterparts in 2021), the US can move towards a stronger “country by country” minimum tax — which acts as a greater deterrent to tax competition and eliminates the perverse effects of global averaging across high and low tax jurisdictions. The agreement ensures that multinational companies throughout the world pay some minimum amount of tax.
Indeed, since multiple countries are moving forward on this agreement despite US inaction, American multinationals will soon be subject to minimum taxes in adopting countries regardless. But US adoption would better align rules with those abroad, reducing the negative impact of overlapping regimes. It could also open opportunities to strengthen US corporate taxation without risking harm to competitiveness. The international tax agreement is an important step forward, but more can be done to reduce the tax incentive to offshore; for example, both the Biden-Harris administration and others have suggested further reducing the deduction for foreign income.
As a remedy for offshoring, tariffs come with damaging side effects. Instead of making the tax system fairer, they shift the tax burden down the income distribution. Instead of moving towards a more level playing field between domestic and foreign operations — by increasing the low tax rates paid by large multinational companies — tariffs introduce new distortions, moving production towards less efficient firms and away from exporters that have met the test of world markets. And, instead of working with other countries to solve a pressing global problem, tariffs beget spirals of retaliation that threaten economic prosperity by destroying the gains from trade.
This last risk is perhaps the most dangerous. In a time of ascendant nationalism and global conflict, we simply cannot afford to add fuel to the fire. Donald Trump’s threats to levy 60 per cent tariffs on China and 10 to 20 per cent tariffs on all other nations of the world — friends, allies and partners alike — risks not just prosperity and tax fairness but also conflict and war.
Yet despite the obvious advantages of reforming corporate tax policy to reduce offshoring and help the middle class, many “populist” Republicans still see multinational profits as too sacred to be challenged. Instead, they push tariff revenue as a way to finance regressive income tax cuts.
Kamala Harris is right to reject these ideas. A future administration should respond to economic discontent in constructive and forward-looking ways, strengthening US fundamentals and building a fairer tax system. In contrast, levying trade restrictions does more harm than good.