The Laffer Curve is a theory developed by supply-side economist Arthur Laffer to show the relationship between tax rates and the amount of tax revenue collected by governments. The curve is used to illustrate Laffer’s argument that sometimes cutting tax rates can increase total tax revenue. The Laffer Curve is alive and well in the Renaissance America of President Donald J. Trump. As a matter of fact the policies of the Trump Administration have demonstrated that the Laffer Curve isn’t constrained by international borders.
You see Trump’s 2017 tax reform is delivering on its promise to bring money back to the US from overseas by making America more competitive.
Before this monumental tax reform the US had one of the highest corporate tax rates in the world. And on top of that we had a worldwide tax system that compared unfavorably with the territorial systems in 28 of the other 36 countries who are members of the Organization for Economic Co-operation and Development (OECD).
The OECD is an intergovernmental economic organization founded in 1961 to stimulate economic progress and world trade.
This worldwide tax system taxed the foreign earnings of US corporations once their overseas profits were brought home. This provided a massive incentive for our corporations to park their earnings from foreign subsidiaries offshore. In the year before Trump’s tax reform US corporations had more than $2 trillion stashed overseas.
Besides this massive reduction in available capital in the US these incentive draining tax policies led many US firms to implement what came to be called “Inversion Transactions.” This means they gave up their status as American corporations and reincorporated in foreign countries often through acquisitions and mergers.
The 2017 tax reform bill President Trump proposed and shepherded through Congress has radically changed all this. This history making law lowered the corporate tax rate from 35% to 21% and it also allowed US companies to bring money home from their foreign subsidiaries at the much reduced US tax rate. On top of that the bill also made changes to laws which address the ownership and profitability of intellectual property. Under the previous laws there were economic incentives to locate the ownership of intellectual property in low-tax foreign countries. That has now been reversed and American is once again the best place on earth to innovate.
The new Trump inspired program has erased the lure of corporate inversions and fostered an economic environment where the US is once again an attractive and competitive place to host international businesses. And there is even proof in a two real world multi-billion dollar examples: The AbbVie acquisition of Allergan and the new Pfizer-Mylan combination.
According to Fox Business News, “Allergan was previously a U.S. company, but in 2015, it became an Irish company through a merger with Actavis. Mylan also was previously a U.S. company, but in 2015, it became a Dutch company. The adverse U.S. tax rules, coupled with low foreign tax rates and territorial tax systems, made it advantageous for the companies to shield non-U.S. income from the reach of the U.S. tax system by becoming incorporated and headquartered overseas.
AbbVie itself tried to invert in 2014, but the Treasury Department blocked its effort. A recent Bloomberg story noted, ‘A few years ago, this deal would likely have gone differently – Allergan would be the one buying AbbVie.’
The 2017 tax reform changed that. Representative Kevin Brady (R-TX), who led the congressional battle for tax reform as Chairman of the House Ways and Means Committee, said following the announcement of the AbbVie-Allergan transaction that, as a result of 2017 tax reform, ‘companies can domicile here and stay competitive throughout the world.’”
And as Robert Willens, an independent tax consultant told Bloomberg, “Unlike an inversion where U.S. income is transformed into foreign income, in the instant case, the polar opposite may well occur since, here, foreign income might be transformed into U.S. income.”
So how is this working today? According to Investor’s Business Daily, “They said it wouldn’t happen, but it did: The money companies stashed overseas to protect them from high U.S. corporate tax rates is flooding back in, boosting growth, jobs and confidence in the economy. Thank the Trump tax cuts.
All told, the Bureau of Economic Analysis (BEA) reported, some $305.6 billion returned to the U.S. from overseas accounts. That’s a $1.2 trillion annual rate, and far more than the $35 billion one year before.”
By changing incentive-killing tax laws which appeared to be more like confiscation and the punishment of success President Trump is making America more competitive which is how he planned all along to Make America Great Again.
Dr. Owens teaches History, Political Science, Global Studies, and Religion. He is the Historian of the Future @ http://drrobertowens.com © 2019 Contact Dr. Owens [email protected] Follow Dr. Robert Owens on Facebook or Twitter @ Drrobertowens or visit Dr. Owens Amazon Page / Edited by Dr. Rosalie Owens