According to Stephen Moore, who had advised President Donald Trump on tax policy and is now under consideration for a job on the Federal Reserve Board, the tax changes passed at the end of 2017 were about putting “American business and American workers first.” The new rules, Moore wrote, would “stop foreigners from eating our lunch and stealing our jobs” by making the U.S. more attractive as an investment destination. (When asked which companies would relocate, Moore mentioned FedEx and Apple .)

On Wednesday, the U.S. Bureau of Economic Analysis published the numbers on cross-border financial transactions from the fourth quarter of 2018. There is now a full year of data to assess Moore’s claims. These data, in tables 4.2 and 6.1, show the new tax regime continues to encourage U.S. companies to avoid tax by channeling their profits through tax havens. Worse, it actively encourages them to increase their physical presence abroad at the expense of domestic investment in plant and equipment to avoid U.S. taxes—the exact opposite of what was advertised.

Between 2010 and 2017, American companies “reinvested” about two-thirds of the profits they earned from their foreign subsidiaries—$2.4 trillion—to avoid paying U.S. corporate income tax. (The remaining $1.2 trillion was distributed to U.S. parent companies as dividends.) Despite being treated as reinvested earnings for tax purposes, the actual transactions involved offices in Ireland, the Cayman Islands, and other tax havens buying dollar-denominated bonds issued by the U.S. Treasury, Fannie Mae, Freddie Mac, Ginnie Mae, and highly rated U.S. corporations.

Contrary to the popular rhetoric, profits were never “trapped offshore.” The money was always in the U.S. There were, however, some limits on how those accumulated earnings could be used: Companies could not use their bond portfolios to pay shareholders, to acquire other companies, or to repay any U.S. creditors.

That said, companies could easily borrow against their holdings by issuing bonds. The odd result was that a not-negligible component of the surge in corporate debt issuance in the past few years came from multinationals effectively borrowing from each other to reward their equity investors while avoiding U.S. income taxes. Unsurprisingly, the biggest consequence of the new tax regime has been a sharp reduction in corporate borrowing.

After paying a one-time tax on their accumulated savings, the new rules allow U.S. companies to distribute profits from foreign subsidiaries without having to pay any U.S. income tax. Moreover, corporate income-tax rates in the U.S. are now much lower than before, which in theory ought to encourage more domestic investment and relatively less foreign investment. Similarly, the change in tax rates relative to the rest of the world ought to have encouraged more foreign companies to invest in the U.S.

The new data suggest U.S. companies have not responded to these incentives in a significant way. (This corroborates what I had suspected after reviewing the numbers from the first three quarters of 2018.)

Editor's Choice

U.S. corporations earned about $520 billion in profits from their foreign subsidiaries in 2018 and collected $665 billion in dividends. The difference represents the total amount of “offshore” cash that was “repatriated” to the U.S. thanks to the new tax rules—about 6% of the total that had been accumulated since 2010. That is not a flow, but a trickle. Moreover, the trickle was short-lived. Foreign subsidiaries of U.S. companies sold assets only in the first half of 2018. By the third quarter, they were once again “reinvesting” their profits, albeit at a lower rate than in previous years. At current rates, the total accumulated sum of reinvested earnings should exceed its previous peak by the middle of 2020, if not before.

At the same time, American companies have increased their investment abroad. “Equity outflows other than reinvestment of earnings” surged in 2018 to their highest level since the financial crisis. The likeliest explanation is that the new tax regime encourages this behavior. Under the new rules, the amount of income that can be earned tax-free from a foreign subsidiary is capped by the value of tangible assets—offices, factories, machines, and so on—owned by that subsidiary. As a recent analysis in The Wall Street Journal put it, “companies can increase their FDII [foreign-derived intangible income] deduction by reducing the amount of tangible capital—such as factories and equipment—that they have in the U.S.”

The net effect is that U.S. companies are investing as much abroad as they were before, now that repatriation seems to have ended:

Foreigners have not responded to the new tax environment by increasing their investment in the U.S., either. While America’s lowered tax rate seems to have encouraged companies based in high-tax jurisdictions such as France, Germany, and Japan to retain more of their U.S. profits in their subsidiaries here, this has been more than offset by reduced inflows from other sources. Foreign direct investment inflows to the U.S. were lower in 2018 than in 2017, 2016, and 2015. Foreign direct investment inflows were also larger in the late 1990s and the mid-2000s, even though the U.S. economy was much smaller back then and the tax environment was ostensibly less attractive:

Foreign investment is not necessarily desirable, and there can be good reasons for American companies to invest abroad to get closer to their customers. But the data suggest the new rules have failed to perform as advertised.

Write to Matthew C. Klein at matthew.klein@barrons.com