Wherever one may land on the applause-o-meter wired to President Trump's latest outline for a tax makeover, it aims to fix an aspect of the code that pretty much everyone agrees is broken: the way the global profits of American corporations are taxed.
The current system — in which profits earned abroad are not taxed until they are brought home — creates perverse incentives, encouraging American companies to park their money in lower-tax havens outside the United States. That stash now amounts to roughly $2.6 trillion.
Repairing that system will require policy makers to confront two vexing problems. The first is how to get American companies to reel in the enormous sum and pay at least some of the tax that is due. The second is to overhaul how foreign earnings are taxed in the future so that multinationals change their ways.
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The broad plan unveiled on Wednesday by Steven Mnuchin, the Treasury secretary, shows that the administration is eager to tackle both issues, but the plan does not provide enough detail to judge whether its approach will actually work.
Republicans and Democrats have railed against the accounting acrobatics that American multinationals exploit to avoid paying taxes on foreign earnings. They buy or merge with foreign companies to establish headquarters outside the United States — a practice known as inversion — or relocate their patents and copyrights to places with low tax rates, like Bermuda or the Cayman Islands. The arrangement not only deprives the United States of revenue but also increases the tax burden on American businesses that cannot or will not move their profits overseas.
The current system has perpetuated a lot of waste and nonsense, said Alan D. Viard, a tax expert at the conservative American Enterprise Institute and a former senior economist at the Federal Reserve Bank of Dallas. The nominal corporate rate is 35 percent, roughly 10 points above the average rate in most developed European nations. That differential encourages tax avoidance, Mr. Viard said.
Apple, for example, has kept earnings abroad and borrowed money from its own foreign subsidiaries to pay dividends and make new investments. Because the interest paid on loans is also deductible, Apple ends up reaping a second tax benefit.
"These bizarre short-term loans are just silliness," Mr. Viard said.
"Whatever the rate is, it should be collected when the money is earned," regardless of whether it is repatriated, he said, adding, "Companies should be free to keep the money where they want and use it however they want."
In the past, policy makers tried to persuade companies to bring home profits by dangling a carrot: a voluntary, one-time tax holiday for companies that brought overseas profits back to invest in the United States. Yet the promised investment boom from a 2005 initiative never materialized, and the tax holiday turned into more of a permanent vacation. Companies did ship some money home — about $299 billion — but nearly all of it was used to increase shareholder dividends or buy back stock.
"There's a lot of evidence that the holiday created no jobs and did not lead to any additional investments," said Kimberly Clausing, an economist at Reed College.
A one-time mandatory tax is better, Ms. Clausing said, but she argues that one imposing an 8.75 percent rate, like the provision in the House Republicans' tax blueprint, or the 10 percent rate that Mr. Trump mentioned during his campaign is still too low. (The plan announced Wednesday did not specify a rate.)
"It is just handing money to some of the people who have done really well in the global economy over the last three decades," she said. "This isn't going to create a single job or start a single factory."
Mr. Viard, of the American Enterprise Institute, agrees. "There is a strong case for a relatively high tax" that is compulsory, he said. Even if a new system steeply cuts multinationals' taxes in the future, in his view, they should not be given a free pass on profits already earned. "We should not give people unexpected windfalls," he said.
In his view, a mandatory 20 percent rate would be appropriate, although unlikely. In 2015, for example, President Barack Obama was unable to stir up enough support to pass an immediate 19 percent tax on American companies' global profits.
As for overhauling the system, President Trump moved closer to the House Republicans. The administration plan endorses a shift away from a worldwide system (in which corporate profits are taxed no matter where around the globe they are earned) to a territorial one (that seeks to tax only profits earned within the United States).
Over the years, more and more countries have switched to a territorial system. Pushing the United States in the same direction, several economists argue, would slow the diversion of investments to other jurisdictions and promote growth in the United States.
But both systems have their pitfalls. As is currently the case, the worldwide system encourages American companies to engage in all sorts of tax-avoidance methods to keep from booking their profits at home. Yet the danger of a territorial system is that without adequate safeguards, it would simply lead to a different set of schemes to shift profits from the United States to foreign subsidiaries, which would, in turn, eat away at the tax base.
Michael J. Graetz, a tax law professor at Columbia University, is not very worried about shifting shenanigans, given that the president is pushing to drop the corporate tax rate to 15 percent. (The House Republican plan would reduce the rate to 20 percent, which would raise more revenue and produce a smaller budget deficit than Mr. Trump's proposal.)
"Once you get the rate down to that low, then the incentive to shift profits offshore decreases," since the difference between the American rate and other countries' is so much smaller, Mr. Graetz said. "Safeguards are then less important."
Not everyone is as optimistic. Shutting those loopholes is crucial to the success of any plan, Ms. Clausing of Reed College said, whether the rate ends up at 15 percent or 20 percent. "The tough and the toothless versions of a territorial tax are very different beasts," she said. Japan and France, for example, designate countries with extremely low tax rates as havens and tax corporate profits sheltered there, she said. A similarly designed approach could work in the United States, she added.
Protecting against base erosion is essential, said Rohit Kumar, a former deputy chief of staff for the Senate Republican leader, Mitch McConnell, and now a co-leader of PwC's Washington National Tax Services. The problem is figuring out how to do it.
"There is no anti-base erosion rule that everybody likes," Mr. Kumar said. "The one that will prevail will be the one that everybody hates the least."
While many Republicans, business leaders and Wall Street analysts would be happy to see tax rates pushed so low, many realize there is a still a long and winding road before a bill is passed.
"The administration's tax-cut proposals are wildly ambitious and will meet very stiff resistance," Ian Shepherdson, chief economist at Pantheon Macroeconomics, wrote in a commentary. "Some tax cuts are likely this year, but not on the scale set out."