Trump Wants To Legalize US Companies’ Tax Dodges

The paper with the tax proposal is only one page long, but it is an affront to Europe; if Trump’s tax ideas ever become reality, economic policy would change throughout the world.

Donald Trump’s tax initiative would also change Germany’s economic policy. At least, if it ever comes to fruition. U.S. companies in Germany earn a lot of money and hide the profits in tax shelters. Trump basically wants to legalize these tricks. Foreign profits are to be brought into the U.S. with the imposition of a minimal tax, as it says in his document, which is only one page and contains few keywords. The president alone cannot implement this idea; rather, he must work with Congress.

We’re talking about a whole lot of money. Apple alone has used tax dodges to save huge sums. The most recent balance sheet notes $217.1 billion that the company has invested in long and short-term securities. The company is not doing anything with that money; it’s just sitting there. Up until now, U.S. tax law requires that Apple transfer about 40 percent of that money to the state if the company wants to finance research in Cupertino, for example.

Even on its own, Apple’s cash reserves are massive. They are almost twice the size of all profits made by the 30 most important German corporations – companies listed on the DAX – in the last year. If U.S. companies’ total foreign reserves were combined in the S&P 500 Index, analysts would find a total of $2.3 trillion for 2015. (Yes, trillions; that is not a translation error.)

Trump’s vague paper does not name figures. Treasury Secretary Steven Mnuchin merely says it would result in a “competitive” solution. U.S. media are reporting that roughly 3-10 percent is being discussed. The aggressive move thus rewards tax evasion by countries like Germany.

In 2004, there was already a one-off discount in the U.S. for corporations that brought money from tax havens into the country. Those corporations had to pay 5 percent at that time. Conditions were supposed to promote jobs and investments. An investigation report by Congress concluded years later that the program did not work. It was a “failure” and expectations were not met.

The push is a snub to Europeans. The European Union Commission imposed severe penalties against Apple, eliciting vocal criticism from the U.S. government under Obama. The corporation was ordered to pay 13 billion euros (approximately $14.2 billion as of April 30, 2017) plus interest as a penalty, in a decision last summer by authorities in Brussels. Apple’s European headquarters is situated in Ireland; Dublin and the company are seeking to legally block the payment. A decision on the matter will take years.

The group of the twenty most important industrialized and emerging countries, the G20, had in fact agreed to combat tax evasion by corporations. The new U.S. administration could block the relevant efforts and trigger an international tax competition. In the mid-1980s, the average tax rate for corporations in industrialized states was around 40 percent. That number has since been just about halved, International Monetary Fund economists have calculated. The reason for this was the global tax competition, its strategic analysis suggests.

Germany currently holds the G20 presidency, and there is a summit meeting in July in Hamburg for the group. However far along Trump’s tax plans are then, they will presumably shape the debate. Whatever the tax rate is, it is also important that corporations actually pay. Up until now, 35 percent is due at the federal level. If Trump gets his way, it will only be 15 percent. Corporations often pay much less than the official rate, because they can deduct various things from their taxes. The more exceptions that are allowed to corporations, the lower the effective rate they have to pay. In Germany, the official rate is around 30 percent; many DAX-listed corporations pay between 20-30 percent.

‘At 40 percent, We’re Not Going to Bring that Money Back’

The owners of affected U.S. corporations – the shareholders – do not believe that Trump will pass tax reform so easily. His move could even make real reform more difficult, some fear. The prices on the most important stock indices fell, as did the value of the dollar, after Trump’s tax paper became public.

It has already been publicly and indirectly announced that reform may be coming. Ahead of the 2016 election, Apple CEO Tim Cook made one thing clear. “We’ve said at 40 percent, we’re not going to bring it back until there’s a fair rate.”* In September, Cook announced that billions of dollars in back taxes would be paid in the United States. Whether he actually has to pay much less than 40 percent is now up to Trump.

*Editor’s note: Although accurately translated, this quoted remark could not be independently verified.