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Tax Reform: Keeping Jobs in the US and Bringing Overseas Cash Home

Tax Reform: Keeping Jobs in the US and Bringing Overseas Cash Home
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By    |   Tuesday, 24 October 2017 08:40 AM

As part of tax reform, President Trump promised the American people he would end tax incentives that encourage companies to move their headquarters and jobs overseas. As the president noted in a February tweet, the best way to do that is to “substantially reduce taxes and regulations on businesses…”

America has one of the highest corporate tax rates in the world, certainly among the advanced economies tracked by the Organization for Economic Cooperation and Development (OECD. The top corporate tax rate in the U.S., a combination of federal and state and local taxes, is nearly 39% vs. 26.7% in Canada, 19% in the United Kingdom, 12.5% in Ireland. It’s the comparatively higher tax rate that leads companies such as Apple and others overseas.

The 50 top overseas cash holders in the S&P 500 parked $925 billion of their cash and marketable securities outside the U.S earlier this year with Apple, Microsoft and Cisco Systems alone have a total of $427 billion stored overseas. Each of these companies the potential to use this cash to fund share buybacks, dividends, acquisitions and capital spending if Congress acts decisively and enacts real reform.

While America’s high corporate tax harms all companies and industry equally, there are specific industries, like the American insurance industry which has been decimated by the perverse incentives of our current tax code. Since the last major tax code rewrite during the 1980s, tax lawyers, accountants and strategists for the industry have taken advantage of a provision in the code that benefits foreign-owned insurance companies and has led to jobs being moved out of the U.S. or eliminated all together.

Hartford, Connecticut used to be the home to American insurance companies. Now Hamilton, Bermuda is the insurance capital of the United States. Companies like White Mountain Insurance, PXRE insurance, the Trenwick Group, Everest Reinsurance, the Argonaut Group, and Global Indemnity, have all moved to offshore. Nationally, employment by insurance carriers has dropped steadily since the early 90's. In the Hartford region has lost thousands of insurance jobs in the past decade, he said, and tens of thousands in the past 25 years. The acquisition of Chubb by ACE last year, is just the latest example. For those wondering the corporate taxes for Switzerland based ACE is around 21%

Using a technique often referred to as “affiliate reinsurance,” dozens of companies used this provision to “spin-off” their companies to low tax havens and migrate their profits from high American tax rates to the lower rates other countries. Sheltering their profits overseas, these now foreign companies have gained a financial advantage over their American counterparts that includes greater after-tax capital for expansion and investment.

If you don’t believe this doesn’t create an incentive for the remaining companies to move abroad, you are mistaken. This is exactly the type of provision in law that the president has routinely bashed.

As Congress begins the heavy lifting of tax reform, Congress should not only reduce corporate taxes to give American companies a leg up against their foreign counterparts, it must address specific provisions of law that incentivize companies to move operations abroad, something that has become too commonplace in the insurance industry.

It makes little sense to maintain tax code benefits that favor foreign-owned insurance companies at the expense of their American counterparts or incentivize U.S. companies to migrate abroad. As the president has noted, this must be reformed.

Christopher (Chris) Versace is the Chief Investment Officer at Tematica Research, editor of the newsletter Tematica Investing, co-host of the Cocktail Investing Podcast and is a featured columnist to The Street.com as well as a contributor to Business Insider and Forbes.com

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As part of tax reform, President Trump promised the American people he would end tax incentives that encourage companies to move their headquarters and jobs overseas.
tax reform keeping jobs in the us and bringing overseas cash home
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2017-40-24
Tuesday, 24 October 2017 08:40 AM
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