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A Better Look at the Tax Reform Numbers

There’s been a lot of heated rhetoric this week about “territorial” taxation, but one fundamental fact is clear:  a competitive territorial tax system would help spark job creation and business investment in America.  Unfortunately, the rhetoric has badly misinformed the American people about what the real facts are.

Here are the key points to keep in mind:

The United States has the highest corporate tax rate in the world.  This rate is a major impediment to our country’s ability to convince business owners to start or expand operations here.  Instead, many companies are moving key operations closer to their consumers (95 percent of the world’s consumers live outside of the U.S.) and to places that use their tax structure more effectively to encourage investment and research.

Unlike virtually all of their foreign competitors, U.S. companies operating globally risk having their earnings taxed twice – first overseas where they make a sale, and second in the U.S. when they attempt to invest those foreign earnings here.  The combination of a high corporate tax rate and the risk of double taxation incentivizes many companies to leave those dollars overseas, investing in new facilities and new employees in other countries instead of the United States.  Forbes today published a column that puts specific data on these facts. 

“The U.S. system seeks to mitigate this bad effect by allowing American-based companies a 'credit' for some of the taxes they pay to foreign governments, but that system is very incomplete.

“And even if it worked perfectly, America’s high corporate tax rate still puts U.S. companies in a very disadvantageous position. If an American firm, Dutch firm, and Irish firm are competing for business in Ireland, the latter two only pay the 12.5 percent Irish corporate tax on any profits they earn. The U.S. company also pays that tax, but then also pays an additional 22.5 percent to the IRS (the 35 percent U.S. tax rate minus a credit for the 12.5 percent Irish tax).”

A competitive territorial system would erase this system of double-taxation, and, combined with a competitive corporate tax rate, would provide a major new incentive for companies to bring their earnings – and the related investments and new jobs – home to the U.S.

We hope that the rhetoric can cool down and that our policymakers can take a closer look at the facts, and move forward with new proposals that will renew America’s economic strength instead of allowing it to slowly slip overseas.

Public Policy Tags: Tax Policy