Both Candidates Support 'Buy American': Both Are Wrong

Both Candidates Support 'Buy American': Both Are Wrong
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There are plenty of differences to be found between Donald Trump and Joe Biden, but on one issue at least they speak with one voice. Of course, on that one issue — so-called “Buy America” regulations — they’re both wrong.

“Buy America” is generally a politically popular concept, evoking ideas of restoring the heyday of American manufacturing. Unfortunately, curtailing trade won’t solve that problem. According to a Ball State study, just under 88 percent of manufacturing job losses are attributable to productivity growth rendering those jobs unnecessary — not those jobs shifting overseas.

Nevertheless, both candidates have pushed “Buy American” ideas, either through campaign pledges or, in the President’s case, policies. On this issue, neither candidate has the right vision for a productive American economy.

While President Trump signed into law the 2017 tax reform law which encouraged foreign income repatriation and headquartering in the United States (more on that later), he has also curtailed foreign trade in many harmful ways. Import taxes on American consumers have more than doubled under President Trump, costing the average American household $555 per year.

Trump has also flirted with “Buy America” rules specifically targeting medical supplies, a potentially disastrous idea in the midst of a pandemic. While a strong domestic industry prepared to manufacture medical supplies is a laudable goal, the American economy has already gone into overdrive producing all kinds of pandemic supplies. Restricting supplies from other countries would only reduce Americans’ access to these products.

But while the President’s ideas would be harmful in terms of responding to the pandemic, Biden’s proposals have the potential to threaten the American economy’s ability to keep multinational corporations headquartered here in the United States.

The 2017 tax reform law included many positive changes, but a significant emphasis was placed upon addressing the incentive structure that kept multinational corporations from headquartering in the United States. Prior to the changes made in this law, businesses headquartered in the United States had to pay U.S. taxes on income earned abroad by foreign subsidiaries when it was paid back to the U.S. parent company.

This may sound like a system designed to make corporations pay their “fair share,” but the truth is that it simply encouraged them to headquarter themselves in a country that would not make them pay taxes on foreign assets, as 29 of the 35 member countries of the Organization for Economic Cooperation and Development (OECD) did. Combined with the relatively high 35 percent American corporate tax rate, it’s no wonder businesses with the means to do so were switching operations to other countries.

The 2017 tax reform law changed that. Multinational corporations headquartered in the United States generally no longer had to pay taxes on income from foreign assets returned to the country (with protections put in place to prevent gaming the system), and the corporate tax rate was reduced to a far more competitive 21 percent. Already, corporations have repatriated over $1 trillion in assets to the United States.

In the face of such successful policy, Biden’s approach would be to go right back to the old system, but worse. Not only would he return to a “worldwide” system of taxing income from foreign assets, but he would charge a 10 percent offshoring surtax. But here’s the thing: the more likely effect wouldn’t be to prevent American multinationals from offshoring jobs, it would be to prevent them from headquartering their operations in the United States in the first place.

The solution to jobs and tax bases moving overseas is not to try to punish businesses that seek out profitable ventures overseas. It’s to create a more business-friendly U.S. tax system that encourages businesses to invest and grow right here. 

Andrew Wilford is a policy analyst with the National Taxpayers Union Foundation, a nonprofit dedicated to tax policy research and education at all levels of government. 

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