Are Republicans delivering a big Christmas present to the tech community in the form of a sweeping tax overhaul? You might think so based on the generally cheerful sentiment from industry groups and leaders.
Both houses of Congress approved the final bill, which makes sweeping changes to the federal tax code, Wednesday. It now awaits President Donald Trump’s signature. Several key components of the bill are undoubtedly going to benefit Big Tech and many in the community aren’t shy about saying so. Tech industry leaders are fairly unified when it comes to the bill’s flagship corporate tax rate cut from 35 to 21 percent.
TechNet, a group that represents about 75 tech and multinational companies, released the following statement urging Congress to pass the tax bill Tuesday. Here’s TechNet CEO Linda Moore.
The final tax reform bill is strong in the key areas that encourage innovation and entrepreneurship and create jobs in America. Lowering the corporate tax rate, transitioning to a territorial tax system, allowing companies to reinvest their overseas profits here at home, and safeguarding the R&D tax credit are important drivers of economic growth. By combining them in tax reform legislation, they will help trigger a new wave of innovation and investment in our nation
Moore’s comments on reinvesting overseas profits reference another big win for tech giants in the bill. It aims to encourage big companies, like Apple and Google, to repatriate profits held overseas by slashing the taxes they have to pay when returning those funds to the U.S. Currently, companies that repatriate profits are taxed at the 35 percent corporate rate when they bring that money back into the U.S. Under the new tax bill, companies would be taxed 8 percent on profits that are held in real estate and hard assets in other countries and 15.5 percent on profits in cash and other liquid assets, according to Vox.
Here’s how the Information Technology Industry Council (ITI) characterizes the change.
Shifting from a global to a territorial tax system will relieve American companies from double taxation and harmonize our tax system with the majority of the developed world. Currently, earnings by a U.S. company abroad can be taxed twice: first, by the foreign country where the sales took place; and, second, by the U.S. government when the earnings come home. This double taxation creates a disincentive for U.S. companies to bring those earnings home and invest them here. A territorial system prevents double taxation, gives the economy a much-needed boost, and puts U.S. companies on the same competitive level as many of their foreign competitors.
However, Vox’s Dylan Matthews claims that the move will have the opposite effect, rewarding companies for holding money overseas and padding corporate pockets without compelling them to create jobs. Citing a similar repatriation holiday in 2004, Matthews says “the hope was that this money would then be invested in job-creating business activities in the US. But that’s not what happened: The top companies repatriating earnings actually shed jobs over the next few years, and the funds were mostly funneled to shareholders in the form of higher dividends and more stock buybacks. That helps wealthy stock owners, but not the overall economy.”
On the startup side, entrepreneurs and investors are celebrating because the GOP abandoned its initial plan to tax stock options and restricted stock units when they vested instead of when they are exercised, as under current law.
“We have always viewed tax reform as an important opportunity to realign the tax code to better support entrepreneurship and spur new company formation … We are thankful the Finance Committee removed language that would have disrupted the equity-based compensation system that is so critical to recruiting and retaining a talented startup workforce,” said Bobby Franklin, CEO of the National Venture Capital Association, in a statement.
The bill also includes a 20 percent deduction for pass-through income, money that is taxed as income of an individual rather than through the corporate tax structure. Republicans say they added this deduction to benefit small businesses, many of which operate as pass-through entities. Startups would hardly be the only organizations to benefit from the deduction, however. A Treasury Department report spotted by The New York Times shows that many pass-through entities are not businesses at all and 69 percent of pass-through income goes to the top one percent of households.
Boeing celebrated the tax bill’s passage by announcing $300 million in charitable donations and “workplace investments.” AT&T says it will give 200,000 employees $1,000 bonuses.
The GOP tax plan clearly benefits the tech industry in many ways but not all of its leaders see the bill as a net gain. CEOs of the Silicon Valley Leadership Group and Bay Area Council sent a joint letter to Congress applauding cuts to the corporate tax and repatriation rates but offering a word of warning.
Here are excerpts from the letter sent Dec. 6:
Lowering the cap on the size of qualified mortgages and limiting the deductibility of mortgage interest to $10,000 will further increase living costs for our residents, and worsen our crisis-level housing affordability problem … We are concerned about the proposal in the Senate bill to eliminate the individual health insurance mandate, which we believe will lead to increased premiums for employers … As the debate over tax reform reaches its final stage, the Silicon Valley Leadership Group and the Bay Area Council ask that you address these issues and imbalances.