Designing international tax reform: lessons from TCJA

Abstract

The Tax Cuts & Jobs Act (TCJA) introduced the most significant changes to the US international tax system in decades. The law changes have been criticized for reducing equity, benefiting wealthier business owners at the expense of individuals in the long term (while also increasing the deficit) adding to complexity, and creating incentives for shifting profits and activities offshore. These critiques give rise to the question of how best, and under what criteria, to evaluate the changes to the international tax system brought about by the US tax reform. This paper analyzes the tax law changes adopted in the TCJA that impact cross-border investment within the context of several decades of policy proposals that recognized the flaws and deficiencies of the prior system and attempted to develop proposals that balanced creating incentives for the efficient use of capital and the benefits of US investment overseas while minimizing incentives for profit shifting. Reviewing the various provisions of the law in the context of a series of reform proposals made over the previous decade shows the extent to which most of the international law changes introduced by the TCJA closely followed these well-developed ideas. And yet, there appears to be a disconnect between the goals of the law change and the extent to which the laws as enacted have effectuated that change. The divergence provides a cautionary tale for public finance economists wishing to engage in international tax regime change.