Both President Trump and Democratic presidential candidate Joe Biden recognize the political imperative of appealing to U.S. citizens who have watched their jobs disappear or become less lucrative. They have floated incentives for keeping jobs in, or returning them to, the United States and penalties for companies that move work offshore. They have also criticized China’s manufacturing dominance (Biden less overtly than Trump). For both candidates, the focus is on bringing manufacturing back to the country, as evidenced by a recent fact sheet on Biden’s tax proposals, which include a penalty for offshoring and incentives for onshoring.
But there’s reason to be skeptical of the candidates’ proposals, whether coming from the left or right. For the past several decades, the loss of U.S. manufacturing jobs has been pronounced — and apparently permanent. In their recent book, The Wolf at the Door: The Menace of Economic Insecurity and How to Fight It, professor Michael J. Graetz of Columbia Law School and political scientist Ian Shapiro analyze the causes of, and propose remedies for, the economic insecurity facing most of the middle class. Their story is integrally tied to the loss of U.S. manufacturing: Of the more than 18 million manufacturing jobs in the United States in 1974, only 12 million remained in 2016. Meanwhile, over the same period, private sector service jobs, which generally pay less than manufacturing jobs, multiplied almost threefold, from 40 million to 104 million.
Those numbers suggest that the focus on bringing manufacturing back to the United States could be warranted. But that narrative belies the reality — described by Graetz and Shapiro — that returning manufacturing jobs are generally much more automated, so there are fewer than hoped for. While trade-related job losses could possibly be reversed (although that’s unlikely), job losses resulting from automation are long-lasting.
Moreover, the information, communications, and technology revolution is threatening more than just manufacturing jobs. As economist Daniel Susskind details in his recent book, A World Without Work, all kinds of jobs, including those of white-collar professionals, will soon be made redundant because of the growth of artificial intelligence. He provides extensive support for his thesis that “this time is different,” preempting criticism that the many prior predictions of robots taking over human jobs have come to naught.
Even if only some of Susskind’s predictions are borne out, Biden’s proposals for a more radically progressive tax regime — applicable to individuals and corporations, as well as wage and capital income — would be insufficient to address how a tax system built primarily to tax wage income can continue to meet the country’s revenue needs as the proportion of that income to total income and wealth continues to shrink.
Biden’s Corporate Tax Proposals
Biden’s proposals are aggressively against offshoring and focused on companies that would shift profits and business operations out of the United States. A new penalty is aimed at those who offshore manufacturing and service jobs to sell goods or provide services back to the U.S. market. It’s imposed via a 10 percent surtax on profits of any overseas production by a U.S. company for sale back to the United States. That may be an attempt to get at what is known as “roundtripping,” a common practice by many pharmaceutical companies in particular that migrate and use U.S.-developed intellectual property offshore to manufacture products that are then sold back into the United States. Other proposals, including some by Republicans, have attempted to address that problem (for example, in 2017 testimony before the Senate Finance Committee, Itai Grinberg noted that “concerns regarding roundtripping motivated the decision to limit the reduced U.S. tax rate on putatively foreign intangible income” in former House Ways and Means Chair Dave Camp’s 2014 proposal to tax income of controlled foreign corporations derived from sales to foreign customers).
The penalty is also supposed to apply to call centers or services by a U.S. company located overseas but serving the United States if the jobs could have been U.S.-based. It’s unclear whether it would apply only to third-party revenue from call centers or if it might allocate a portion of U.S. companies’ domestic sales revenue to backup service support and subject that income to the penalty if the services were performed overseas.
Biden would deny otherwise available deductions for the costs of moving jobs or production overseas if those jobs could “plausibly” be offered to U.S. workers. The details of how that would work are crucial: The mess that is the qualified Opportunity Zone credit illustrates how an idea with progressive appeal (encouraging investment in distressed neighborhoods) can end up as nothing more than a tax avoidance bonanza. And how does one determine what jobs could plausibly be offered to U.S. workers? Is it reasonable to require that a job be offered for triple or quadruple the wages that would be paid overseas, if doing so means the business runs at a loss?
The flip side of the offshoring penalty is Biden’s “Made in America” tax credit, a 10 percent advanceable credit available to companies making investments that create jobs for U.S. workers and accelerate economic recovery. The September 9 fact sheet describes four types of expenses for which the credit would be available:
Investments made to revitalize closed or closing facilities to enable them to reopen for job-creating production, such as a new company or worker-owned cooperative that reopens or renovates a closed factory to produce a new product.
Expenses incurred to retool any facility to “advance manufacturing competitiveness and employment,” such as a steel plant that invests in new machinery and equipment to meet new Buy American standards or improve export competitiveness as long as it maintains its overall U.S. wage base. According to the fact sheet, the criteria for investment may be expanded for selected industries deemed essential for national or health security or select industries of the future being subsidized by the Chinese government.
Expenses for new investment made to return job-creating production, or call center jobs or other service jobs, to the United States, including shipping and moving costs and the costs of training new personnel.
Investments made to expand or broaden U.S. facilities to increase U.S. employment, but only as long as the investment represents an expansion of U.S. production and doesn’t simply relocate existing jobs or production in the United States.
Further, the credit would be applied to a company’s incremental increase in overall manufacturing wages in the United States in excess of a “historic, pre-COVID baseline” for manufacturing jobs paying up to $100,000.
One problem with many of the incentives to bring jobs back is that they provide greater rewards to companies that moved jobs offshore to begin with. And the differential between U.S. and foreign wages is often greater than 10 percent. As a result, those kinds of incentives are often characterized by the extent to which they encourage inefficient tax planning.
Biden has also proposed raising the corporate tax rate to 28 percent, along with several other measures targeting provisions of the Tax Cuts and Jobs Act that progressive Democrats have been eyeing for the past three years. He would double the tax rate on foreign earnings, but not bring that rate on par with his proposed statutory rate (even though he has criticized the TCJA for taxing foreign earnings at a rate lower than that applied to domestic earnings — it’s unclear if the proposed foreign rate is a mistake). Biden also takes aim at the exemption from the global intangible low-taxed income regime for a normal return on assets, which the fact sheet refers to as a “Trump offshoring loophole.”
Finally, Biden has proposed modifying GILTI so that it would apply on a country-by-country rather than worldwide basis. That’s essentially what the regulatory high-tax election does anyway. (Prior analysis: Tax Notes Federal, Aug. 24, 2020, p. 1363.)
Precursors to Biden
Many aspects of the TCJA attacked by Biden were proposed by Democratic lawmakers and the Obama administration — for example, an Obama budget proposal to expand U.S. taxation on CFC earnings would have taxed those earnings at a lower rate than the corporate statutory rate. But the purely partisan enactment of the TCJA means all its provisions are ripe for criticism, regardless of whether any might have had bipartisan support. Several Democratic bills have proposed repealing the TCJA either partly or entirely, and some have incorporated measures similar to those proposed by Biden, including full taxation of foreign earnings (with no section 250 deduction) and a minimum tax imposed on a per-country basis.
A bill introduced last year by Sen. Amy Klobuchar, D-Minn. (S. 1610, the Removing Incentives for Outsourcing Act), would have removed the exemption for the normal return on tangible assets (available in section 951A(b) for qualified business asset investment) and applied GILTI country by country, and H.R. 5933, the Disclosure of Tax Havens and Offshoring Act, introduced by Rep. Cynthia Axne, D-Iowa, would amend the Securities and Exchange Act of 1934 to require CbC disclosure (the Biden proposals do not include those kinds of disclosure requirements). Others, such as H.R. 1712, the Stop Tax Haven Abuse Act, by Ways and Means Committee member Lloyd Doggett, D-Texas, go further. Doggett’s bill would repeal the check-the-box rules, limit U.S. interest deductions based on a group worldwide ratio, and require CbC disclosure.
Even before the TCJA’s enactment, a tax similar to Biden’s roundtripping penalty had been proposed to subject imported products manufactured overseas to full subpart F rates. H.R. 2005, the Offshoring Prevention Act introduced in 2017 by Rep. David N. Cicilline, D-R.I. (now chair of the House Judiciary Subcommittee on Antitrust, Commercial, and Administrative Law, investigating big tech companies), would have included as a new category of subpart F income any income from property imported into the United States by a CFC or related person. Similar proposals include S. 863, the Offshoring Prevention Act, introduced by Sen. Sheldon Whitehouse, D-R.I.; H.R. 305, the Offshoring Prevention Act, introduced by Cicilline in 2015; and then-Sen. Max Baucus’s 2013 discussion draft on tax reform, which included a proposal to annually tax income from selling products and providing services to U.S. customers at full U.S. rates with limited exceptions.
Obama also proposed a new general business credit against income tax equal to 20 percent of the eligible expenses paid or incurred in connection with insourcing a U.S. trade or business (defined as reducing or eliminating a trade or business, or line of business, conducted outside the United States and starting up, expanding, or otherwise moving it to the United States, if doing so increased U.S. jobs). A 2013 bill (S. 337, the Bring Jobs Home Act) by Finance Committee member Debbie Stabenow, D-Mich., would have provided a 20 percent credit for insourcing expenses, defined as eligible expenses paid or incurred by the taxpayer in connection with eliminating an overseas business unit and incurred in connection with establishing a business unit in the United States if the new U.S. establishment constituted the relocation of the eliminated unit.
Taxing foreign earnings at the full rate that applies to domestic earnings would pressure U.S. companies to invert, so Biden says he will also strengthen anti-inversion rules. But there’s only so much one can do in that regard before pushing U.S. companies to incorporate overseas at the outset.
Biden and the OECD’s Digital Project
The work toward a consensus on the OECD’s pillars 1 and 2 proposals may be pinned on a change in U.S. administration to push the project over the finish line and nudge the U.S. business community into acquiescence. And to a degree, the idea of higher domestic rates and a less permissive corporate tax regime might make U.S. companies more receptive to some aspects of the OECD proposals. But as the OECD secretariat and inclusive framework are starting to realize, U.S. opposition to other countries’ discriminatory taxes is bipartisan.
At the same time, it’s unclear how Biden’s proposals might interact with the OECD proposals, which are undergoing final tweaks. Pillar 1 would impose higher taxes on many U.S. multinationals by allocating some share of lower-taxed profits to market countries. That could result in a portion of U.S. companies’ profits being subject to double tax, with the U.S. fisc picking up the tab for the remaining reallocated amount — hardly a result that would appeal to any administration. Pillar 2 would impose its own version of a global minimum tax but on a different base than that under U.S. law. GILTI will supposedly be grandfathered under any final pillar 2 agreement, although that aspect of the proposal was left out of the leaked blueprint. (Prior coverage: Tax Notes Int’l, Aug. 24, 2020, p. 1087.) But any grandfathering would have to be for a moving target, given that the GILTI regime could change.
Taxing Income in a ‘World Without Work’
Biden has also proposed several measures that would raise taxes on wages for high-income individuals and on capital gains — specifically, he would tax capital gains at ordinary rates for high-income individuals. He has also proposed to tax wealth more (or better) by eliminating the step-up in basis for inherited assets with capital gains and taxing those gains at death. Noticeably absent from Biden’s proposals are ideas like those of ranking Finance Committee member Ron Wyden, D-Ore., who last year outlined a plan for mark-to-market taxation of public assets held by high-wealth individuals, and a regime for non-tradable assets similar to the passive foreign investment company rules.
Some of Biden’s platform matches proposals by Graetz and Shapiro, who consider why good policy ideas sometimes don’t get enacted, as well as the political coalitions needed to realize productive policies. But Graetz and Shapiro’s ideas — like many of Biden’s — are limited in that they primarily address the types of manufacturing job losses and accompanying economic insecurities that led to the opioid epidemic and high suicide rates among middle-aged white men in particular. (See also Angus Deaton and Anne Case, Deaths of Despair and the Future of Capitalism (2020).) None of their ideas address how to solve a world without work, ideas that are explored more fully — although still without any great answers — by Susskind.
Susskind’s approach of analyzing what he refers to as “task encroachment,” or machines’ ability to take over tasks that have historically been performed by humans, provides a more nuanced and complete understanding of the extent to which machines are likely to take over human activity that generates wage income (and the income tax base). As Susskind notes, machines are increasingly encroaching on tasks that until now have required the ability to think and reason, including drafting and reviewing legal documents.
Disparate labor costs are one reason why the extent to which machines have replaced humans differs by location. The practical implications of that calculus are that encouraging businesses to move operations back to the United States will tend to accelerate the use of machines because labor costs are higher there than in the offshore locations from which jobs may be repatriated. In short, Susskind’s book highlights the long-term problem of structural technological unemployment, a problem Biden’s proposals don’t really address.
A world without work isn’t a problem just because it creates economic insecurities and leads to political instability — although those consequences are severe. It’s also problematic because it highlights how ill-equipped the tax system is to collect revenue from, and redistribute income to, taxpayers and citizens when there’s simply less proportionate income from wages.
Recognizing the challenges that automation poses for the revenue base and for income support, some observers have proposed taxing machines. Orly Mazur of Southern Methodist University Dedman School of Law explores those themes in “Taxing the Robots,” 46 Pepp. L. Rev. 277 (2019), pointing out that the U.S. government receives more than $1 trillion in revenue annually, or approximately one-third of its total tax revenue, from employment taxes. If lots of jobs are lost to automation, simply taxing higher-income earners more won’t be enough to make up for the various taxes on wage income imposed on both employees and employers. One can articulate the alternative as taxing robots, but that really means imposing higher taxes on the profits generated by robots, or capital income.
Conclusion
Biden’s tax proposals include a hodgepodge of previously proposed Democratic ideas with popular appeal designed to address perceived threats from globalization and offshoring of jobs — the same type of appeal that worked for Trump in 2016. Neither candidate’s proposals address the greater threat to job security — namely automation, a trend that seems likely to only accelerate with onshoring activity. But threats to workers, income, and the U.S. revenue base from automation are real and will likely create the need for increased taxation of capital income — a concept proposed (in limited form) by Biden but not Trump.
Mindy Herzfeld is professor of tax practice at University of Florida Levin College of Law, of counsel at Ivins, Phillips & Barker, and a contributor to Tax Notes International.