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Harris Wants to Cut Part of Trump Tax Law That Democrats Support

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Harris Wants to Cut Part of Trump Tax Law That Democrats Support

  • Her health plan would tax offshore profits same as domestic
  • Democrats helped devise international tax changes in GOP law
Health Care Dominates the Democratic Debate

Democratic presidential candidate Kamala Harris says she would fund her health-care plan by rolling back one of the few changes in President Donald Trump’s tax law that Democrats actually wanted.

The California senator wants to fund her version of “Medicare For All,” which she says would allow Americans to buy into a public-run option or keep their private insurance, by taxing domestic and offshore profits at the same rate.

That could face resistance within her own party, because it would unwind one of the few parts of the 2017 Republican tax law that Democrats helped develop, even as it may resonate with voters who want to see corporate America pay more taxes.

The tax overhaul passed without any Democratic votes and largely no input in the drafting. But prominent Democrats -- including Senate Minority Leader Chuck Schumer and House Ways and Means Chairman Richard Neal -- had in the years before that pushed to make it easier for U.S. companies to operate globally, a change that Republicans ultimately included in their 2017 tax law.

‘Territorial System’

The overhaul cut the corporate tax rate to 21% and moved toward a so-called “territorial system” under which companies pay the U.S. banner rate on domestic profits only. The law included a minimum tax so corporations operating in low or no-tax countries still pay some tax on their earnings.

Democrats say they would have backed a higher rate -- more like 28% -- but the underpinnings mirror a bipartisan international tax plan Schumer and Senator Rob Portman, an Ohio Republican, released in 2015. Democrats say they opposed the law because it cut taxes too much for corporations and the wealthy and didn’t do enough for middle-income earners.

“As the importance of success in foreign markets has grown, the United States has become less competitive abroad because of its worldwide system of international taxation,” Schumer and Portman wrote in their 2015 report. “No matter what jurisdiction a U.S. multinational company is competing in, it is competing at a disadvantage.”

Democrats say that Republicans didn’t implement their broad agreement in a way that upheld the spirit of their shared goals. Every proposal from the Obama administration and Republicans included moving toward a territorial system, but the two sides -- led by Portman and Schumer -- couldn’t broach differences over their base erosion measures, according to a Schumer spokesman. That’s the key distinction that determines whether you stop bad activity, like offshoring and tax evasion the spokesman said.

Offshoring Worries

Schumer’s office referenced a letter Senate Democrats sent to Trump days before he signed the bill into law.

“The Republican tax bills, as drafted, will reward companies that offshored jobs with a large tax cut on old profits unavailable to companies that kept their production in the United States,” the Democrats’ letter said. “This disparity may actually encourage companies to move production and jobs overseas.”

Democrats and Republicans both expressed concern before the 2017 tax law was enacted that the outdated tax code made it difficult for U.S. companies to compete with their foreign competitors, and invited corporations to move their headquarters and jobs offshore. At the time, large American companies -- such as Burger King Worldwide Inc., Eaton Plc and Medtronic Plc -- were relocating their head offices abroad for tax reasons by doing deals known as corporate inversions.

“It feels like ancient history, even though it was only a few years ago. Every couple of weeks you would read about another company announcing they were inverting or shifting profits offshore,” said Jennifer Acuña, a former Senate Finance Committee tax aide who’s now at accounting firm KPMG. “Everyone agreed that was a bipartisan issue.”

Read more: ‘Inversion’ Gives U.S. Companies Tax Addresses Abroad: QuickTake

Before the 2017 law, corporations paid a 35% tax rate on profits no matter where they were earned in what’s known as a “worldwide” tax system. However, companies could defer actually paying the tax on offshore earnings until they brought the cash back to the U.S..

Harris doesn’t specify if companies could defer the tax on the foreign profits under her proposal, or minimize their tax bills by applying foreign tax credits to the U.S. liability. But her plan to revert to worldwide taxation could give incentives for companies to resume corporate inversion deals, which largely stopped after the 2017 law, said Kyle Pomerleau, an economist at the right-leaning Tax Foundation.

“Worldwide taxation makes companies immensely sensitive to their headquarter location,” he said. “Though I’m not convinced that the new system got rid of the incentive. It’s still there but to a much smaller degree.”

‘Model of Sophistication?’

Democrats and Republicans have criticized the tax law for not working as intended, so much so that Trump-appointed Treasury official Dana Trier was asked to resign after he publicly asked, “Do you think it’s a model of sophistication?”

Where Democrats are on taxes now is likely to be different to where they were in 2015, said Frank Clemente, the executive director of Americans for Tax Fairness. They’re realizing that they may have lost the 2017 tax battle, but are winning the messaging war, he said.

That’s caused presidential candidates, including Harris and former Vice President Joe Biden, to call for repealing the whole thing. Complaints that U.S. companies weren’t competitive before the tax law were overblown, said Kim Clausing, an economics professor at Reed College in Portland, Oregon. During the years leading up to tax reform, companies’ after-tax profits were substantially higher than they were in the 1980s and 1990s, she said.

“Most people don’t have a superfine, nuanced sense about international taxation and are susceptible to arguments that we have to compete with other countries,” she said. “People find it unfair that the U.S. will charge less for income in Bermuda than in U.S. People don’t like off-shoring or tax havens.”

For now, Congress is at a standstill on tax issues. Republicans want to make minor tweaks to their 2017 law, but Democrats won’t support changes unless there are also major revisions to cull the tax breaks for companies and wealthy individuals. Under the right president, Congress might be able to work together on taxes again, said Senator Tom Carper, a Delaware Democrat.

“The Finance Committee has a history of being bipartisan,” he said. “We’re gotten away from that, but I think we’re returning to our roots.”

(Updates with Schumer spokesman in eighth paragraph.)