Top

International

Pillar Two and the U.S.: A Policy Explainer for Navigating the Global Minimum Tax

The OECD expects countries to implement components of Pillar Two, its framework for a global minimum tax, starting in 2024. The US is likely to cede tax rights to foreign jurisdictions if it does not enact new tax law. Pillar Two will likely reshape the nature of tax competition between countries, incentivizing greater use of subsidies and refundable tax credits to counteract higher statutory rates.

W2023-1 Pillar Two and the U.S.: A Policy Explainer for Navigating the Global Minimum Tax

Did Tax Cuts and Jobs Act of 2017 Increase Revenue on US Corporations’ Foreign Income?

Did Tax Cuts and Jobs Act of 2017 Increase Revenue on US Corporations’ Foreign Income?

Despite a complete overhaul of the US system of international corporate taxation in the Tax Cuts and Jobs Act of 2017, taxes on US corporations’ foreign income are about the same after the law’s enactment as before.

President Biden’s FY2023 Budget Proposal: Budgetary and Economic Effects

President Biden’s FY2023 Budget Proposal: Budgetary and Economic Effects

We project that President Biden’s FY2023 Budget, taken as a whole, would reduce debt and grow the economy by 0.4 percent over time, with two major components of the Budget---"Build Back Better” and “New Provisions”---working in opposite directions.

Revenue and Profit Shifting for the U.S. in a Global Minimum Tax Agreement

Revenue and Profit Shifting for the U.S. in a Global Minimum Tax Agreement

PWBM estimates that tax policy changes in low-tax countries in response to the recent OECD global minimum tax deal could cost the U.S. as much as 50 percent of its minimum tax revenue.

Incentives to Shift U.S. Multinational Profits to Foreign Countries under Tax Changes Proposed by House Ways and Means Committee

Incentives to Shift U.S. Multinational Profits to Foreign Countries under Tax Changes Proposed by House Ways and Means Committee

We project that recent tax reforms proposed by the House Ways and Means Committee would increase the incentive of U.S. firms to shift intangible investments and profits to foreign countries with a tax rate below 20.7 percent.

Statutory U.S. Corporate Tax Rates vs the OECD under Proposed Changes by House Ways and Means Committee

The House Ways and Means Committee reforms proposed as part of budget reconciliation would increase the U.S. statutory corporate income tax rate to 26.5 percent, bringing the combined federal and state rate to 30.9 percent, making the U.S. rate the third highest among OECD members.

Effective Tax Rates on U.S. Multinationals’ Foreign Income under Proposed Changes by House Ways and Means and the OECD

Effective Tax Rates on U.S. Multinationals’ Foreign Income under Proposed Changes by House Ways and Means and the OECD

The House Ways and Means Committee reforms proposed as part of budget reconciliation would more than triple the U.S. tax rate on multinationals’ foreign income and produce a higher rate than a proposed global agreement currently being negotiated through the OECD.

Profit Shifting and the Global Minimum Tax

Profit Shifting and the Global Minimum Tax

We estimate that the recent OECD proposal for a global minimum tax would triple the effective U.S. tax rate on foreign income from 2 percentage points to 5.8 percentage points. The Biden administration’s proposed changes to the U.S. global minimum tax regime would instead raise the effective U.S. tax rate on foreign income to 12.4 percentage points.

Projections of Global Intangible Low-Taxed Income: A Validation Exercise

Under current law, PWBM projects that U.S. multinationals will report a cumulative $3.6 trillion in Global Intangible Low-Taxed Income (GILTI) between 2022 and 2031. Data released in July 2021 by the Internal Revenue Service for the 2018 tax year provides the first opportunity for a more extensive validation of PWBM’s model of U.S. multinationals’ tax returns. PWBM projects 2018 GILTI within 5.3 percent of the IRS value, suggesting a very good model fit.

President Biden’s FY2022 Budget Proposal: Budgetary and Economic Effects

President Biden’s FY2022 Budget Proposal: Budgetary and Economic Effects

PWBM estimates that President Biden’s FY2022 budget proposal would increase spending by $6.1 trillion and increase revenue by $3.9 trillion over the 2022-2031 budget window. By 2050, we project that the President’s budget proposals would decrease public debt by 5.1 percent and decrease GDP by 1.5 percent relative to current law.

Decline of Globalism: Capital Flows Update

Using more recent data on international capital flows, we find that the “effective openness” of the U.S. economy has decreased to 31.5 percent openness for private capital flows and 33.3 percent U.S. debt take-up by foreigners. This decline is in line with our prediction from last year’s posts on the effect of tariffs.

Tariff’s Projected to Raise Prices for Americans

The New York Times’ Jim Tankersley cites PWBM in an explanation of how Trump's tariffs erase the benefits of the current tax cuts. In particular, Tankersley finds that the benefits of Trump's tax cuts to the lower and middle classes will likely unwind as a result of his tariffs on goods from China, Mexico, and Europe.

Implementing a Partially Open Economy in the PWBM Dynamic OLG Model

PWBM’s Dynamic OLG model simulates the partially-open U.S. economy in a way that is more consistent with economic behavior than standard “model blending” exercises. The difference between the two techniques becomes more pronounced over time due to the nation’s expanding debt path.

Trading Tangible for Intangible: The Incentives Created by GILTI and FDII in the TCJA

The recent Tax Cuts and Jobs Act (TCJA) contains two key international tax provisions: the tax on Global Intangible Low-Taxed Income (GILTI) and the reduced tax rate on Foreign Derived Intangible Income (FDII). These provisions were designed to encourage United States-based multinationals to locate intangible intellectual property in the U.S. rather than in foreign jurisdictions. However, an aspect that is overlooked is that these same provisions also create incentives for U.S. firms to acquire tangible assets abroad and to sell tangible assets in the U.S. Future monitoring of these activities is required to assess the extent to which U.S. multinationals will shift production overseas in response to the incentives created by GILTI and FDII.

Estimates of TCJA Repatriation of Foreign Earnings on Investment and GDP

An important part of the discussion surrounding the passage of the Tax Cuts and Jobs Act (TCJA) was the accumulation of untaxed profits in U.S. corporations’ foreign subsidiaries, which were estimated to be as high as $2.8 trillion in 2017. Before 2018, these earnings were generally not subject to U.S. taxes unless they were paid to the U.S. parent corporation as a dividend (“repatriated”), leading many companies to accumulate profits abroad. The TCJA introduced a deemed repatriation provision, which provides a tax “holiday” for foreign earnings by taxing them at a reduced rate of 15.5 percent on cash and eight percent on other assets. Speaker Paul Ryan argued that the TCJA’s tax holiday for foreign dividend payments directly affects the economy because, “money will come back and that will help economic growth.” Indeed, many companies have already committed to significant repatriation amounts, with Apple notably pledging to pay $38 billion in tax on repatriated income.

The White House's Trade Policies and the Economy

A recent CNBC article by John Harwood, Peter Navarro says Trump’s trade policies are ‘good for the market,’ but economists aren’t buying it, applies two Penn Wharton Budget Model (PWBM) studies on the effects of tax cuts by industry and the probable effects of a trade war. The author analyzes the possibility that recent administration actions increasing protectionist measures would slow economic growth.

The Impact of a Trade War Could Wash Out Tax Cuts

A CNNMoney story, “Trade War Would Wipe Out Gains From Tax Cuts, Penn Analysis Says,” applies two Penn Wharton Budget Model (PWBM) studies on trade and tax cuts. Patrick Gillespie points out that two of President Trump’s policies could have opposing effects on economic growth. If the new tariffs announced by President Trump lead to an all-out trade war, gains from the tax cuts could be washed away in the short run and swamped in the long run.

The Economic Costs of a Trade War

The Economic Costs of a Trade War
  • Major U.S. trading partners have already indicated they might retaliate to new U.S. trade tariffs recently announced by President Trump. New tariffs could, therefore, lead to a “trade war.” However, game theory also suggests that U.S. trading partners could eventually respond with “trade opening,” depending on the ultimate payoffs to each party in the trading partnerships.

  • We estimate that an all-out trade war would reduce GDP by 0.9 percent by 2027 and by 5.3 percent by 2040. Wages would decline by 1.1 percent by 2027 and 4.8 percent by 2040, relative to current policy. A trade opening would have the opposite effect: GDP would increase between 0.2 to 0.7 percent by 2027 and between 1.3 to 4.0 percent by 2040. Wages would increase between 0.3 to 0.8 percent by 2027 and between 1.2 - 3.6 percent by 2040, relative to current policy.

  • The downside risk of a trade war, therefore, is larger than the upside potential from a trade opening.