Trump's Tax Reform "Global Con" Game


Brad Setser is sure to fuel a long debate over the merits of Trump's tax reform. Setser labels it a "global con".

Simple Message

Setser asks: Why would any multinational corporation pay America’s 21 percent tax rate when it could pay the new “global minimum” rate of 10.5 percent on profits shifted to tax havens, particularly when there are few restrictions on how money can be moved around a company and its foreign subsidiaries?

Setser notes: "Despite Mr. Trump’s proud rhetoric regarding tax reform during his State of the Union address, there is no wide pattern of companies bringing back jobs or profits from abroad. The global distribution of corporations’ offshore profits — our best measure of their tax avoidance gymnastics — hasn’t budged from the prevailing trend."

State of the Union Claim

Trump bragged yesterday in his State of the Union Address about tax reform. I commented Trump Delivered His Speech Very Well, But Too Little, Too Late.

Let's not confuse delivery with either substance or agreement.

One of my readers did just that, commenting, "I’m amazed that you gave Trump a pass on his tax policies."

I responded, "Precisely where did I do that? I never said I agreed with Trump about anything other than socialism and wars. He had a good delivery. That does not imply agreement. I certainly disagree on Iran, taxes, drugs, and lots of things."

I expect the same kind of problem here. People will attack Setser, well, just because he is Setser. First, let's tune into what he is saying. Them we can discuss where is is right or wrong, leaving the personality aside.

Global Con Hidden in Trump’s Tax Reform Law

Please consider Global Con Hidden in Trump’s Tax Reform Law, Revealed, a NY Times Op-Ed by Brad Setser.

Last night, President Trump reserved a few minutes of his State of the Union address to praise his tax reform law, which turned a year old last month. To promote its passage, Mr. Trump and his congressional allies promised Americans that drastically lowered corporate tax rates would bring home large sums of capital that had been stashed overseas and finance a surge of domestic investment.

The White House argued they wanted a system that “encourages companies to stay in America, grow in America, spend in America, and hire in America.” Yet the bill he signed into law includes a sweetheart deal that allows companies that shift their profits abroad to pay tax at a rate well below the already-reduced corporate income tax — an incentive shift that completely contradicts his stated goal.

A multinational corporation can route its global sales through Ireland, pay royalties to its Dutch subsidiary and then funnel income to its Bermudian subsidiary — taking advantage of Bermuda’s corporate tax rate of zero.

Eliminating the complex series of loopholes that encourage offshoring was a major talking point in the run-up to the 2017 tax bill, but most of them are still in place. The craftiest and largest corporations can still legally whittle down their effective tax rate into the single digits. (In fact, the new law encourages firms to move “tangible assets” — like factories — offshore).

According to the Treasury Department’s tally for fiscal year 2018, corporate income tax receipts fell by 31 percent, an unprecedented year-over-year drop in a time of economic growth (presumably a time when profits and government revenue should rise in tandem).

For their next trick, the companies worked with their political allies to favorably frame the 2017 tax debate. When he was the House speaker, Paul Ryan was fond of talking about $3 trillion in “trapped” profits abroad. But those profits weren’t actually, physically, sitting in a few tax havens.

As Adam Looney — a Brookings Institution fellow and former Treasury Department official — has explained, companies that needed to finance a new domestic investment could simply issue a bond effectively backed by its offshore cash. (For instance, Apple could bring its “trapped” funds onshore by selling a bond to Pfizer’s offshore account, or vice versa.)

Put plainly, they got the best of both worlds: Uncle Sam could tax only a small slice of their books while they traded with one another based on the size of the entire pie.

Dwarf Economies Giant Profits

Image placeholder title

Where Setser is Correct

  • There was no money trapped overseas. That was always a lie to get yet another tax holiday.
  • Rather than closing loopholes, the alleged reform created new ones.
  • Corporate tax receipts did decline by 31%.
  • The Double-Dutch (Ireland-Netherlands) strategy has not really been fixed.
  • The 10.5% minimum rate abroad vs the 21% rate in the US still encourages capital and business flight.
  • Worst of all, the new law encourages firms to move tangible assets including factories, overseas.

In short, I agree with every point Setser made above. That is not to say I agree with Setser about everything.

My Disagreements

I do believe in low corporate taxes. Ideally they should be zero. But I also believe in balanced budgets.

People expected Trump to "drain the swap". He didn't. Deficits have soared totally out of control.

And for what? More military spending is the answer.

The worst part of the bill, and one that I mentioned at the time, was that the US corporate tax structure ought to, at a minimum, encourage jobs to move to the US.

The alleged "reform" bill did not fix that basic problem. A good start would have been a tax structure with a higher tax rate on overseas profits than in the US.

Corporations move jobs overseas for a variety of reasons: Taxes, shipping costs, labor differentials. There are many reasons to have multiple factories or be located overseas.

But there is no reason tax laws should encourage that action.

Multiple Failures

  1. The reform did very little for most of the middle class
  2. The reform dramatically added to the deficit
  3. The reform will not release "trapped" money because the money isn't really trapped in the first place
  4. The reform did not eliminate incentives that still encourage business to move overseas

Trump's tax cut was a front-loaded failure on at least four fronts.

Mike "Mish" Shedlock

Comments (21)
No. 1-15

As long as you tax activity, tax policies will influence which activities get performed where. And, much worse, more and more resources will get directed at influencing who pays, and who does not pay.

Instead, just tax real property. Dead simple, noone will ever cheat, you don't need more than a few administrative staff at the IRS, noone needs to spy on, nor demonize, anyone.

And the taxes you pay, will be in proportion to the amount of use you make of, and the benefit you derive from, the nation levying the taxes. Avoiding all childish squabbles about where your "primary residence" is and other similar lawyer welfare nonsense.

Instead, it's efficient has heck.

The only reason you don't hear more about it, is because in feudal states like what the West has again become; the privilege to rape, pillage and enslave their underlings at arbitrary will, are always ultimately backed up by privileged landgrants granted the privileged by unconstrained government. Yet the grants should somehow be enforced by taxes levied not on the privileged who benefit from them themselves, but rather on everybody else. Absent that, feudalism/progressivism simply couldn't put up pretense of working.


There have been two huge blunders behind the current sad state of affairs in how corporate America is mis-managing cash. The first occurred in 1982 when the SEC decided, in it's infinite wisdom, that it would be OK after all for corporations to arbitrarily jack around with their capital structures by buying back shares. Prior to 1982, the practice was illegal. However, the SEC's real blunder in retrospect was in not specifically disallowing any personal financial gain by management to result from stock buybacks. Predictably, human nature being what it is and all, Boards and corporate officers quickly determined that they should spend twenty times more cash on stock buybacks than they had before the 1982 SEC ruling...and they have. The reason is simple: It's far easier to drive p/e ratios and make your comp plan nums by simply driving down shares outstanding with buybacks than actually producing something you can sell at a profit.
The second, recent blunder was in Trump's tax bill regarding cash repatriation from foreign subsidiaries. Tax avoidance should have been predicated on using the repatriated cash only for incremental R&D and capital investment. It wasn't, and, lo and behold, C suite denizens everywhere discovered that their"best use" of repatriated cash was...YES! Drive their own comp plans! Disgusting.


"People expected Trump to "drain the swap". He didn't. Deficits have soared totally out of control. And for what? More military spending is the answer."

There is no data to support this theory.


The 2017 US Budget: Military spending is less 15% of the budget. Entitlement spending is 63%+ of the budget.

Military spending (as a % of GDP) has been on a slow and gradual decline since the 1950s (from 15% GDP to 4.5% GDP in 2020).

Spending on defense (as a % of GDP) has been practically unchanged since 2004 with the minimum being 4.24 (in 2017) and maximum being 5.66 (in 2011).



"There is no data to support this theory."

Absurd. Did he do anything about entitlements? Military spending? Perpetual war (other than talk?) OK he met with North Korea, but he threatens to blow up Iran.

His tax policy increased the deficit. His tariff policy has been a total disaster.

How totally fucking stupid to say he is draining the swamp!

Trump supporters seriously need to get their heads out of their asses and look at reality.

Trump has one thing going for him: He's better than Hillary.

Make that two things: His Supreme court picks have been good.



How idiotic to defend military spending on the sole basis that other things are equally if not more stupid!


Mish the economy is doing great because of his tax policies. After all its spending $3300 more on each and every citizen that it takes in. $13000 for a family of 4 that is being pumped into the economy. How great, what could go wrong?


Are buybacks only allowed in the US? If corporations have excess cash but don't want to invest in expansion or more r&d because of market conditions, did they just use this cash to pay dividends prior to buybacks being legal?


I completely agree Mish. Trump’s tax policies encourage off-shoring. His tariff policies hurt US based manufacturers and consumers. And, after 10 years of economic growth, he has managed to reduce tax income while increasing spending and blowing up the deficit. How incompetent. Worst President ever.


Now, if corporate taxes have been reduced as shown by a reduction of 31% in Federal revenues, where is the corresponding drop in prices to consumers? I don't see it.


Mish thinks corporate tax rate should be 0%. I happen to think income taxes on income from current employment is terrible for employment. Also happen to think that tax breaks on the costs of debt are a terrible idea which favors debt over equity financing. I am curious to know what Mish thinks should be the tax base.


Exactly Mish, 'repatriation' wasn't actually the transfer of value from overseas to the United States, but was rather just the mere fact of settling with the IRS for taxes owed on pre-tax cash. By giving companies a tax break on so-called fake "repatriation", Trump was forever encouraging and legitimizing the practice of "creating" profits overseas, and then merely waiting until an administration favourable to such 'repatriation' passed an amnesty. Effectively gaming the system and giving the global corporations a lower effective tax rate. If anything, there should have been a significant penalty assessed on such corporations. (most of those corporations are also significantly abusive of other US policy, such as H-1B visas).

Meanwhile Trump's prototypical supporter base do not have such tax shifting opportunities. Small and even medium size business cannot do the "Double Dutch Irish Ice Cream Sandwich" nonsense like Google does.

With 'friends' like Trump who needs enemies? Lol.


If such causes firms to invest in more capacity, then certainly consumer prices can drop. But it appears that there is little to no desire for investment, and any tax reductions will end up in the hands of shareholders in the form of more buybacks and dividends. Since shareholders are heavily concentrated in the economy amongst the top 5% of the population, don't expect it to do much of anything for final demand. However, the incrementally higher US national debt due to lower tax rates will hit the lower and middle classes the hardest due to a systemic increase in debt servicing costs.


"Corporations move jobs overseas for a variety of reasons: Taxes, shipping costs, labor differentials. There are many reasons to have multiple factories or be located overseas.

But there is no reason tax laws should encourage that action."

I disagree. Encouraging everyone to move jobs overseas helps destroy leftist labor unions, which historically drove up American wages and standards of living, while reducing corporate profits.

Today we really have the best of all worlds: labor unions essentially gone (working on the public sector), a broad base of low-skill, low-income labor, historically high profitability, massive public borrowing wth the proceeds going to the wealthy while the children of the takers have pay it off, and historically low taxes.

What's not to like? And with the consolidation of the media, the idiot working-class takers are voting for this! Gotta love this country!


Hi JonSellers. Your analysis is correct. And it is so ironic. There is a segment of society which is anti-labour union. (personally, I am agnostic) Yet this segment often includes many who complain about the lack of wage increases. So often they make statements like ”if there is a shortage of workers, why aren’t wages skyrocketing?”. What they forget is that individuals have almost zero leverage when it comes to negotiating higher wages unless they have an incredibly unique skill set to offer. This reality is why I am always encouraging people to continuously improve their skill set in order to survive in today’s labour market. The days of workers having low skills, but the leverage of a union to help them get higher wages, are gone. Corporations will continue to off-shore jobs. That is reality. Workers will continue to receive tiny wage increases because they have no leverage to get more. That is also reality.


Well we haven't seen any Irish corporate inversions like we saw in the Obama years. Isn't that a result of the tax reform, and isn't that good?

Global Economics