Imagine a tax system that gave foreign companies an advantage over American companies.
Imagine a tax system that made American companies operating in the U.S. pay taxes, but gave foreign companies a pass.
Imagine a system that encouraged foreign companies to buy out their American competitors.
You don’t have to imagine it – because that’s the tax system we have today.
President Trump is asking Congress to enact an America First tax system. It is no exaggeration to say that the system we have today is, in too many ways, an America Last system.
Take the case of the insurance industry – please.
For decades, the Washington elites and the smart set have been telling us that manufacturing is passé and the future lies in the “new service economy.”
And insurance is high on the list of service industries. It’s the “I” in FIRE – Finance, Insurance and Real Estate – the Big Three service industries that now account for 20 percent of U.S. GDP.
It’s considered so important that when previous administrations negotiated trade deals, they made prying open foreign markets for insurance companies Job 1, even as they outsourced our manufacturing industries to cheap foreign labor camps.
The Obama administration sold the TransPacific Partnership (now dead, thanks to President Trump) as a new opportunity for U.S. insurers to sell policies abroad.
Boosting insurance sales was also a talking point in the Obama administration’s push for the U.S.-South Korea free trade agreement. (For the record, the U.S. trade deficit in goods doubled with Korea after that deal went into effect – not the rosy scenario its promoters promised.)
But in Washington, the left hand typically doesn’t know what the right hand is doing.
While one was working overtime to make it easier for American companies to sell insurance on bamboo-and-thatch huts in Vietnam, the other was making it harder for those same companies to write policies on mansions in Beverly Hills.
The U.S. is the largest and most lucrative market for property and casualty insurance in the world, accounting for 43 percent of the global market for these lines.
But thanks to our tax code, American insurance companies are at a disadvantage in their own country.
Foreign insurance companies get to use a loophole in our tax code to avoid paying taxes American companies have to pay.
This tax break allows foreign companies to offshore their profits to countries like Bermuda and Switzerland where they pay low or no taxes.
Insurance companies themselves buy insurance known as reinsurance. Foreign companies operating in the U.S. by their reinsurance from their own offshore branches – a neat trick called “affiliate reinsurance” – to offshore their profits and avoid taxes.
The big global players have used this stash of tax-free money to buy up American companies and increase their share of the world’s largest insurance market. American businesses, homeowners and drivers end up sending more of their premium payments to foreign-owned companies.
We’d like to believe that Congress never intended to subsidize foreign-owned companies over their American competitors – but that’s exactly what’s happened.
Congress can correct this mistake now that President Trump is calling for America First tax reform.
The Joint Tax Committee estimates closing the loophole for foreign insurance companies would raise nearly $9 billion dollars.
That would help pay for the tax cut middle-class Americans need and level the playing field for American businesses.
Call it a double indemnity payoff.
