By Alex M. Parker

Law360 (October 30, 2020, 7:06 PM EDT) -- President Donald Trump and former Vice President Joe Biden have advocated remarkably similar tax measures to lure jobs back to the U.S. and penalize companies that move them abroad, but experts question whether they amount to anything more than election-year noise.

Populist anger about corporate greed and the decline in domestic manufacturing remains high, and the coronavirus pandemic has raised new concerns about America's supply chains for crucial medical equipment. In this environment, both candidates have touted "Made in America" tax policies comprising both carrots and sticks to bring more facilities to the U.S.

But Trump has yet to produce details about his rhetoric, including how his promises would differ from his administration's ongoing trade wars, which have produced few dividends for American workers.

And Biden's proposed tax penalties for offshoring and tax credits for domestic manufacturing have left many experts baffled, and don't appear to be big enough to create substantial incentives for job creation.

Targeting Offshoring

At a campaign stop in Michigan flanked by American-made automobiles, Biden in September vowed to penalize companies that engage in "offshoring."

The term can refer to a number of corporate maneuvers to move facilities or hire workers outside the United States, but the Biden campaign has defined it narrowly. A campaign fact sheet said the 10% Offshoring Tax Penalty would target "those who offshore manufacturing and service jobs to foreign nations in order to sell goods or provide services back to the American market." It would apply to income not only from sales but also that linked to services such as call centers when the jobs "could have been located in the United States."

The 10% penalty would apply as a surtax on the company's existing tax liability, raising the overall corporate tax rate from an increased rate of 28% to 30.8%, according to the campaign. The current corporate tax rate is 21%

"This is just a big generation for tax lawyers and tax accountants. They ought to be pretty pleased with this proposal," said Gary Hufbauer, an economist and former assistant secretary for international trade and investment policy at the U.S. Treasury Department. "It would do a certain amount of paperwork, but not have much effect."

To the extent it does have an impact, it may not be what voters hope for. Hufbauer noted that because it applies only to U.S. companies, it would put them at a disadvantage compared to foreign competitors.

"It's a zero-sum view of how investment is done. Those notions are basically wrong," he said. "It's really cutting in the wrong direction, even though it's maybe small and symbolic."

Hufbauer is now a nonresident fellow at the Peterson Institute for International Economics, a think tank based in Washington, D.C.

The inclusion of services such as call centers raises even more questions. Most companies use call centers as a cost of doing business, not a source of potential profits. While the penalty could use transfer pricing to estimate the potential value, that would create even more administrative headaches, for little gain.

"It seems to me that this is just wishful thinking, that there are these obvious ways that corporations have done Americans wrong, and there's an obvious way to attack it," said Mary Lovely, a professor of economics at Syracuse University.

Whether or not a Biden administration would truly push for the surtax as a separate policy, the issue is likely to become enmeshed in his proposed changes to the 2017 Tax Cuts and Jobs Act , which he also blames for encouraging offshoring. Tweaking the tax on global intangible low-taxed income so it does not exempt depreciable tangible assets, his campaign claims, will not only end an incentive for companies to move jobs offshore but will also help the U.S. prepare its medical supply chains for the next pandemic.

GILTI pulls in a category of U.S. companies' offshore earnings for U.S. taxation, based on their returns from tangible assets.  
 
But there is disagreement among tax experts on whether GILTI really does lead to offshoring, or if there is enough evidence in the few years it has existed to know either way. 

'Made in America' Tax Credit

Aside from the stick, Biden also vowed to provide a carrot in the form of a 10% advanceable tax credit for companies that make "investments that will create jobs for American workers and accelerate economic recovery to build back better," according to his campaign.

It would apply to companies that revitalize vacant or closing facilities, "retool" existing capabilities for advanced technology while retaining their current workforces, or expand or broaden existing U.S. production. Companies that raise manufacturing wages beyond their pre-pandemic baseline could also qualify.

Biden would also grant the credit for "any expense or new investment related to the process of bringing back production —or call center jobs or other service jobs — from overseas to the United States, including shipping and moving costs and the costs of training new personnel."

Budget analysts have noted that these conditions could lead to disagreements about what qualifies and potential manipulation, similar to the controversies surrounding the opportunity zones in the TCJA.

A lack of clarity about what would constitute "new investment related to the process of bringing back production" has led to drastically different analyses about how the credit would affect federal revenues and the economy.

The American Enterprise Institute calculated that the credit would cost $300 million over 10 years, basing the estimate on a proposal from the Obama administration that would apply only to a narrow set of ancillary expenses for onshoring existing facilities. But the Urban-Brookings Tax Policy Center said the policy could cost as much as $230 billion, assuming it would be a much broader tax incentive applying to domestic investments in general.

Even at that price tag, the measure would only partially offset Biden's proposed business tax hikes, which would increase the tax costs for new investment, a TPC economic analysis released on Oct. 29 noted.

The policy could be the likeliest to create bipartisan momentum in Congress.

"I do see the Made in America tax credit as something that you might get a bipartisan proposal and legislation on that done," said Daniel Bunn, vice president of global projects at the Tax Foundation. "But that's something that you're providing to companies, as opposed to something that you're taking away from them."

Trump Tariffs

The president has been especially stingy with details about his second-term tax agenda, but has used the stump to vow to bring jobs home with the tax code.

"We will also provide tax credits to bring jobs out of China back to America, and we will impose tariffs on any company that leaves America to produce jobs overseas," he said at the Republican National Convention in August.

It is unclear whether Trump hopes to target China specifically in his tax policies, or if he is using the country as an example. But either way, he would need to persuade Congress to create substantial investment to match the subsidies other countries have been using to bolster their domestic industries.

And while federal law gives the president wide latitude to determine tariffs, it stops short at allowing an administration to target individual companies based on their past behavior, as Trump suggested.

Trump's White House could fine-tune the tariff schedule to target products so specifically that, in effect, companies are singled out. But that would lead to years of legal challenges, Hufbauer said.

"It sounds bizarre but it would be technically feasible," he said.

The administration would also likely face pushback from Congress, including members of his own party who remain skeptical of a protectionist approach.

"It's tricky, because we have such an interdependent global economy now with supply chains," said Sen. Rob Portman, R-Ohio, when asked about Trump's proposals during a webinar with the Tax Policy Center. "I think the best way to do it, frankly, is what we've been doing and doing more of it. In other words, being competitive globally."

The Biden and Trump campaigns did not respond to requests for comment.

--Editing by Robert Rudinger and Joyce Laskowski.

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