The following article by David J. Lynch was posted on the Washington Post website December 15, 2017:
On the Friday before Thanksgiving, Kenny Johnson left the Nelson Global Products plant in Clinton, Tenn., for the last time. Having devoted nearly 13 years to making tractor-trailer exhaust pipes, Johnson, 41, spent some of his final weeks at the plant watching Mexican workers train to take his job.
“They brought three or four groups at different times,” he said. “To learn the jobs that are going to Mexico.”
This was the kind of economic dislocation that President Trump vowed to prevent with his “America First” policies. Over the past year, he threatened to impose a new tax on companies eyeing offshore locales and repeatedly proclaimed the imminent return of millions of lost American jobs from overseas.
But presidential jawboning has been no match for the market. To cut costs in a competitive global environment, Nelson Global executives in May announced the closure of the Clinton facility and a sister plant in Minnesota.
Clinton’s 149 jobs and equipment were distributed among company facilities in North Carolina and Monterrey, Mexico, workers said, even as the president trumpeted his agenda of economic nationalism in Washington.
“He hollered that he was going to put a stop to that,” Johnson said. “And he obviously did not.”
Trump, in fact, might actually make things worse.
What happened to the workers in Clinton, tax experts say, will probably happen to more Americans if the Republican tax overhaul becomes law. The legislation fails to eliminate long-standing incentives for companies to move overseas and, in some cases, may even increase them, they say.
“This bill is potentially more dangerous than our current system,” said Stephen Shay, a senior lecturer at Harvard Law School and former Treasury Department international tax expert in the Obama administration. “It creates a real incentive to shift real activity offshore.”
As a candidate, Trump vowed to stop companies from moving offshore by imposing a 35 percent border tax on those that sought to ship products home from their new foreign plants.
“A Trump administration will stop the jobs from leaving America,” he told a cheering crowd in Hershey, Pa., the weekend before Election Day. “The theft of American prosperity will end.”
As president, he appeared to score a quick victory by persuading Carrier to reverse a planned relocation of 1,100 Indiana jobs to Mexico, though the company proceeded months later with hundreds of layoffs.
Trump has rejected what he called “the offshoring model” and said a simple “pro-American” tax code would be essential to reversing the job drain.
“The biggest winners will be everyday working families as jobs start pouring into our country,” he said in September.
This year, companies such as Wells Fargo, Microsemi and Caterpillar have announced plans to shift work overseas from U.S. sites, according to a Labor Department office that determines worker eligibility for retraining aid. Along with relocating assembly lines, other companies, such as Apple and Microsoft, have avoided U.S. taxes by formally assigning the intellectual properties behind innovative products — and the profit that comes from them — to foreign jurisdictions.
The United States loses about $100 billion annually in forgone tax payments to corporate profit shifting, said Kimberly Clausing, an economics professor at Reed College who specializes in the taxation of multinational firms.
The final version of the tax bill would reduce the U.S. corporate tax rate from 35 percent, one of the world’s highest, to 21 percent. That change, a response to long-standing pleas from the business community, is designed to encourage more investment in the United States, which in turn would create more jobs and lift wages.
Yet as Congress nears a final vote on the almost-500-page legislation, some workers have soured on the plan.
“Knowing President Trump, it’ll probably benefit companies and the higher-up people more than everyday workers like us,” said Johnson, who earned $16 an hour as a materials handler.
Under current law, the 35 percent corporate tax is due on profit earned overseas only when it is returned stateside. The legislation, however, would permit the estimated $2.6 trillion that corporations have stockpiled outside the country to return to the United States subject to a rate expected to be around 15 percent.
In the future, corporations would be required to pay about a 10 percent minimum tax on overseas income above a certain level. The provision is billed as a way to discourage the movement of jobs and profit overseas. But the fine print of the new global minimum tax would make the problem worse, several tax specialists said.
“The overall effects of this are going to be unambiguously bad for the workers that it’s ostensibly designed to help,” Clausing said.
There are three reasons, according to nonpartisan tax experts. First, a corporation would pay that global minimum tax only on profit above a “routine” rate of return on the tangible assets — such as factories — it has overseas. So the more equipment a corporation has in other countries, the more tax-free income it can earn. The legislation thus offers corporations “a perverse incentive” to shift assembly lines abroad, said Steve Rosenthal of the Tax Policy Center.
Second, the bill sets the “routine” return at 10 percent — far more generous than would typically be the case. Such allowances are normally fixed a couple of percentage points above risk-free Treasury yields, which are currently around 2.4 percent.
As a result, a U.S. corporation that builds a $100 million plant in another country and makes a foreign profit of $20 million would pay roughly $1 million in tax versus $4 million on the same profit if earned in the United States, said Rosenthal, who has been a tax lawyer for 25 years and drafted tax legislation as a staffer for the Joint Committee on Taxation.
Finally, the minimum levy would be calculated on a global average rather than for individual countries where a corporation operates. So a U.S. multinational could lower its tax bill by shifting profit from U.S. locations to tax havens such as the Cayman Islands.
It’s unclear how taxes affected Nelson Global’s restructuring decision. Company officials did not respond to telephone and email requests for comment. As a rule, factors such as relative wage rates, proximity to customers and availability of workers shape corporate location decisions.
To really slam the door on offshoring, the minimum tax should be calculated on a country-by-country basis, and the rate should be set closer to the 21 percent U.S. rate, Rebecca Kysar, a professor at Brooklyn Law School who specializes in international tax law, and other analysts say.
Companies also are likely to continue to locate valuable intellectual property overseas to pay a lower rate than what they would face in the United States, likely to be around 20 percent, analysts said.
“The plan does not meaningfully reduce the incentives for companies to move their operations and shift their income overseas,” Kysar said. “You could say it will make things worse.”
Apple is perhaps the most prominent among many corporations that have legally avoided billions of dollars in U.S. taxes through paper maneuvers that assign lucrative intellectual properties behind products such as software to low-tax foreign jurisdictions.
By establishing foreign subsidiaries that legally had no tax residence — and in at least one case had no physical presence and no employees — the company escaped massive tax bills, according to a 2013 Senate investigation.
Such gamesmanship leads to financial results that defy common sense. In 2008, the most recent year available, U.S. companies’ foreign units booked nearly $77 billion in profit in Ireland, one of Europe’s smallest countries, and just $22 billion in Germany, the most populated, according to the Bureau of Economic Analysis.
The tax code’s role in encouraging U.S. companies to move jobs or profit to other countries has been a perennial source of political debate, especially among liberals. In 2004, Sen. John F. Kerry (D-Mass.) decried “Benedict Arnold” corporations for shirking their tax bills by slipping abroad.
Eight years later, Barack Obama called Mitt Romney the “outsourcer in chief” for presiding over job movements as a private-equity executive at Bain Capital.
In 2008, the $938 billion in profit reported by foreign subsidiaries of U.S. companies was more than triple the 2000 figure, while the number of workers employed by those units increased over the same period by just 21 percent.
Still, it’s difficult to get a precise estimate of the number of jobs that have moved offshore since globalization kicked into high gear with China’s entry into the World Trade Organization in 2001. The Economic Policy Institute, a labor-union-backed think tank, says 3.2 million jobs were lost or displaced because of Chinese competition; Michael Hicks, an economics professor at Ball State University, says trade has cost the U.S. 750,000 workers.
Over the past seven years, almost 1 million new factory jobs have been created in the United States. But total manufacturing employment remains at 12.5 million, almost exactly what it was in 1941, shortly after Nelson Global Products first opened its doors.
In May, Steve Scgalski, the company’s chief executive, announced the plant closures in Tennessee and Minnesota, billing them as essential “to ensure cost effectiveness and the continued growth of the company.”
Workers in Clinton like Robert Powell, 56, a forklift operator, struggled to understand the rationale. The plant was “doing pretty good,” he said. “Keeping up with orders, best safety record around.”
When vans began bringing small groups of Mexican workers to the factory this summer, Powell was among those who taught them how to operate the factory equipment. Hampered by the language barrier, he resorted to hand signals.
In October, a Labor Department official in Washington ruled that the Nelson Global workers were eligible for retraining and health insurance through a federal program designed to help workers hurt by trade.
With just a high school degree, Powell worries that his age and relative lack of education will hurt his prospects. But he hopes to use the retraining aid to earn a truck driver’s license.
Powell clocked out from his $11.50-an-hour job for the last time Dec. 1, just a few hours before the Senate approved a $1.5 trillion tax cut on a nearly straight-party-line vote. The Republican measure is heavily tilted toward corporations and the well-to-do, analysts say, despite the president’s initial promise of delivering relief for the middle class.
Powell lives in Morgan County, where Trump last year trounced Hillary Clinton 5,441 to 1,054. “He’s really wanting to do good stuff for us,” he said of the president. “He’s pretty popular around this area.”
Asked whether he expects to benefit from the tax cut, Powell paused. “It’s hard to say,” he finally said. “I was hoping I would.”
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