Getting The TCJA Right

The Tax Cuts & Jobs Act (TCJA) did not just cut taxes.  It also contains the most significant international tax reform since the inception of the corporation income tax, moving the United States away from a worldwide orientation to a system that exempts from tax certain dividends received from foreign affiliates (as is the case in nearly every other advanced economy).  But a recently proposed regulation from the Trump Administration could undercut the success of this reform.

This international tax reform enhances U.S. growth and competitiveness.  Under the prior worldwide system, when a U.S. firm competed with a German firm in the UK, both paid the UK tax.  But unlike the German firm, the U.S. firm would then owe a 2nd layer of tax up to the prior 35% U.S. corporate rate, putting it at a competitive disadvantage.  The U.S. firm could “solve” this problem by not repatriating the earnings to the United States, but that just distorted capital structures and harmed the U.S. economy.  Further, the prior rules encouraged takeover of U.S. companies by foreign competitors to escape the uncompetitive U.S. international tax regime.

The TCJA fixed this uncompetitive, anti-growth approach to business taxation – almost.