Territorial (Tax) Behavior
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It’s estimated that $1.7 trillion in profits is held outside the United States by foreign subsidiaries of American companies. Under our current tax system, there’s not a great incentive for these companies to bring those earnings to the United States to invest and create jobs. This is because the United States has a “worldwide” system for taxing corporate profits as opposed to a “territorial” system.
For a refresher, the Tax Foundation has a good video explaining worldwide versus territorial tax systems.
In short, under a worldwide system, U.S. companies have to pay additional tax when profits earned in other countries are brought back to the United States. A territorial system would reduce that penalty by eliminating this second layer of tax on repatriated overseas earnings.
As this paper from the Senate Republican Policy Committee notes, the U.S. is out of synch among developed economies:
Among G-7 countries, only the U.S. has a worldwide tax system. Among OECD nations, 26 have territorial systems including Australia, Canada, France, Germany, Japan, Spain, and the United Kingdom. Eight OECD nations have worldwide systems, including the U.S., Greece, Ireland, South Korea, and Mexico. The other OECD nations with worldwide tax systems have top tax rates far below the top U.S. corporate tax rate.
Diana Furchtgott-Roth and Yevgeniy Feyman of the Manhattan Institute argue that moving from a worldwide to a territorial system would make American companies more competitive globally and bring an influx of capital into the U.S. for investment and job creation. They note that if a territorial system only drew half of the estimated profits held ($850 billion) it “would exceed the stimulus in the 2009 American Recovery and Reinvestment Act.” This massive pool of funds could then be reinvested by businesses to hire American workers. In addition, “the federal government would get billions in tax revenues,“ Furchtgott-Roth and Feyman write.
More investment, more jobs, and more revenue for the government. Sounds like a good trifecta.