The tax reform plan proposed by the Trump administration “would likely give the typical American household a $4,000 pay raise,” according to the excerpts released by the White House ahead of President Donald Trump’s tax pitch in Harrisburg, Pennsylvania on Oct. 11.
The plan allows American corporations to bring their overseas money back to the country, and Trump claims this change, along with a lower tax rate, will result in higher income for families.
Bringing back the money trapped overseas and rate cuts, “conservatively will increase the median wage by $4,000 a year in a relatively short time,” said Kevin Hassett, chairman of the Council of Economic Advisers.
And more optimistic estimates suggest $10,000 to $20,000 income growth over time, he said at “Cracking the Tax Code: Prospects for Tax Reform” on Oct. 11, hosted by the political website The Hill.
The tax reform plan proposes a shift from a worldwide tax system to a territorial tax system to bring corporate income parked overseas back to the United States. Under the current worldwide system, U.S. multinational corporations pay domestic tax on foreign earnings, which creates a competitive disadvantage for them.
“Our current tax system makes us one of the few developed nations in the world to punish our companies when they bring wealth earned overseas back into our country,” said Trump when he announced the details of his tax reform framework on Sept. 27.
Under the territorial system, American companies will be able to bring those profits back to the country without paying additional taxes. This will level the playing field for U.S. companies, according to Trump.
As a transition to the territorial system, there will be a one-time tax payable on profits that have already accumulated overseas. Two different tax rates will be applied: one for cash and cash equivalents, and another, lower rate for illiquid assets.
According to Hassett, there is a discrepancy between corporate income growth and wage growth in the United States.
“The relationship used to be one for one. If profits grow, wages will grow as well,” he explained at the Hill event. But that pattern was broken in the 1990s, he said.
Over the last 8 years, the average real income growth is only 0.6 percent per year, while the corporate profit growth over the same time is almost 11 percent annually, according to Hassett.
“And this is because American profits are in Ireland,” he said.
Ireland has a 12.5 percent corporate tax rate, one of the lowest rates in the world.
For many years, U.S. corporates have left cash in their foreign subsidiaries to avoid high taxes. The total amount of accumulated income across all industries is nearly 3 trillion, according to House Speaker Paul Ryan.
The existing U.S. tax code has also created a strong incentive for American corporations to reincorporate abroad in low-tax countries like Ireland, a strategy known as tax inversion.