Mitt Romney is being criticized for supporting “territorial taxation,” which is the common-sense notion that each nation gets to control the taxation of economic activity inside its borders.
While promoting his own class-warfare agenda, President Obama recently condemned Romney’s approach. His views, unsurprisingly, were echoed in a New York Times editorial.
President Obama raised…his proposals for tax credits for manufacturers in the United States to encourage the creation of new jobs. He said this was greatly preferable to Mitt Romney’s support for a so-called territorial tax system, in which the overseas profits of American corporations would escape United States taxation altogether. It’s not surprising that large multinational corporations strongly support a territorial tax system, which, they say, would make them more competitive with foreign rivals. What they don’t say, and what Mr. Obama stressed, is that eliminating federal taxes on foreign profits would create a powerful incentive for companies to shift even more jobs and investment overseas — the opposite of what the economy needs.
Since even left-leaning economists generally agree that tax credits for manufacturers are ineffective gimmicks proposed for political purposes, let’s set that topic aside and focus on the issue of territorial taxation.
Or, to be more specific, let’s compare the proposed system of territorial taxation to the current system of “worldwide taxation.”
Worldwide taxation means that a company is taxed not only on it’s domestic earnings, but also on its foreign earnings. Yet the “foreign-source income” of U.S. companies is “domestic-source income” in the nations where those earnings are generated, so that income already is subject to tax by those other governments.
In other words, worldwide taxation results in a version of double taxation.
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).
In an attempt to deal with this self-imposed disadvantage, the U.S. tax system also has something called “deferral,” which allows American companies to delay the extra tax (though the Obama Administration has proposed to eliminate that provision!).
Romney is proposing to put American companies on a level playing field by going in the other direction. Instead of immediate worldwide taxation, as Obama wants, he wants to implement territorial taxation.
But what about the accusation from the New York Times that territorial taxation “would create a powerful incentive for companies to shift even more jobs and investment overseas”?
Well, they’re somewhat right…and they’re totally wrong. Here’s what I’ve said about that issue.
If a company can save money by building widgets in Ireland and selling them to the US market, then we shouldn’t be surprised that some of them will consider that option. So does this mean the President’s proposal might save some American jobs? Definitely not. If deferral is curtailed, that may prevent an American company from taking advantage of a profitable opportunity to build a factory in some place like Ireland. But U.S. tax law does not constrain foreign companies operating in foreign countries. So there would be nothing to prevent a Dutch company from taking advantage of that profitable Irish opportunity. And since a foreign-based company can ship goods into the U.S. market under the same rules as a U.S. company’s foreign subsidiary, worldwide taxation does not insulate America from overseas competition. It simply means that foreign companies get the business and earn the profits.
To put it bluntly, America’s tax code is driving jobs and investment to other nations. America’s high corporate tax rate is a huge self-inflected wound for American competitiveness.
Getting rid of deferral doesn’t solve any problems, as I explain in this video. Indeed, Obama’s policy would make a bad system even worse.
But, it’s also important to admit that shifting to territorial taxation isn’t a complete solution. Yes, it will help American-based companies compete for market share abroad by creating a level playing field. But if policy makers want to make the United States a more attractive location for jobs and investment, then a big cut in the corporate tax rate should be the next step.
[…] issues such as depreciation, net operating losses, worldwide taxation, and carry forwards probably set the record for inducing boredom, but I suspect most people also […]
[…] Territorial taxation vs. worldwide taxation […]
[…] case is partly a fight between proponents of territorial taxation (the good guys) and proponents of extraterritorial taxation (the bad […]
[…] Higher taxes on domestic business income, higher taxes on foreign-source business income, higher taxes on business investment, more double taxation of capital gains, a tax on financial […]
[…] I think nations have the right to tax income earned inside their borders, so I’m not theoretically opposed to the U.K. […]
[…] From the moment the bureaucracy’s anti-tax competition project began about 20 years ago, I explained that the OECD was seeking to destroy financial privacy so that uncompetitive governments could track capital and impose high tax rates on income that is saved and invested. In effect, the battle over “tax havens” and “tax competition” were a proxy for whether there should be more double taxation and more extra-territorial taxation. […]
[…] to consumption taxation is very analogous to the fight between “territorial” and “worldwide” approaches to income […]
[…] in approved behaviors. There are also provisions of the tax code – such as depreciation and worldwide taxation – that force taxpayers to overstate their […]
[…] in approved behaviors. There are also provisions of the tax code – such as depreciation and worldwide taxation – that force taxpayers to overstate their […]
[…] Secretary Lew (a oleaginous cronyist) is no friend of American business because of his embrace of worldwide taxation and […]
[…] WSJ correctly points out that the problem is America’s anti-competitive worldwide tax regime, combined with a punitive corporate tax […]
[…] For a wide range of reasons, including sovereignty, simplicity, and competitiveness, nations should only tax economic activity within their borders. The House GOP plan does that for business income, but apparently does not extend that proper […]
[…] Yet the OECD Protocol to the Multilateral Convention is based on the notion that there should be pervasive double taxation of income that is saved and invested, and that these taxes should be levied on an extraterritorial basis. […]
[…] States has the highest corporate tax rate in the industrialized world, combined with having the most onerous “worldwide” tax system among all developed […]
[…] States has the highest corporate tax rate in the industrialized world, combined with having the most onerous “worldwide” tax system among all developed […]
[…] system of “worldwide taxation” requires American-domiciled firms to pay tax on income that was earned – and already […]
[…] and adopt a territorial tax system. And Prof. Desai is right. If the U.S. government stopped the anti-competitive practice of “worldwide” taxation, inversions would […]
[…] re-domicile in jurisdictions with better tax law to escape America’s high corporate tax rate and self-destructive worldwide tax system. And I’m glad these “inversions” continue to take place even though the Obama Administration […]
[…] in jurisdictions with better tax law to escape America’s high corporate tax rate and self-destructive worldwide tax system. And I’m glad these “inversions” continue to take place even though the Obama […]
[…] He also is the only candidate (to my knowledge) who doesn’t want to replace America’s anti-competitive worldwide tax system with a territorial tax […]
[…] the United States has the most punitive “worldwide” tax system, meaning the IRS gets to tax American-domiciled companies on income that is earned (and already […]
[…] have to worry about the tax bias of depreciation. You don’t have to worry about the anti-competitive policy of worldwide taxation. And you wipe out a bunch of corrupt tax […]
[…] gains tax burden for partnerships that receive “carried interest.” And he would impose worldwide taxation on […]
[…] all need to be addressed, along with additional problems with the internal revenue code, such as worldwide taxation and erosion of constitutional freedoms and civil […]
[…] all need to be addressed, along with additional problems with the internal revenue code, such as worldwide taxation and erosion of constitutional freedoms and civil […]
[…] that worldwide tax system is extremely pernicious, particularly when combined with America’s punitive corporate tax […]
[…] Replace worldwide taxation with territorial taxation. […]
[…] Replace worldwide taxation with territorial taxation. […]
[…] Replace worldwide taxation with territorial taxation. […]
[…] should also point out that the new tax system proposed by AEI would be territorial, which would be a big step in the right direction. And it’s also important to note that the X tax has full expensing, which solves the bias against […]
[…] should also point out that the new tax system proposed by AEI would be territorial, which would be a big step in the right direction. And it’s also important to note that the X tax has full expensing, which solves the bias […]
[…] Though you won’t be surprised to learn that Obama isn’t contemplating any good unilateral changes. Instead, the policies being examined would exacerbate double taxation and extend worldwide taxation. […]
[…] Though you won’t be surprised to learn that Obama isn’t contemplating any good unilateral changes. Instead, the policies being examined would exacerbate double taxation and extend worldwide taxation. […]
[…] be addressed, but I also acknowledged additional concerns with the internal revenue code, such as worldwide taxation and erosion of constitutional freedoms an civil […]
[…] be addressed, but I also acknowledged additional concerns with the internal revenue code, such as worldwide taxation and erosion of constitutional freedoms an civil […]
[…] that is earned (and already subject to tax) in other countries. This approach, known as “worldwide taxation,” is contrary to good tax […]
[…] that is earned (and already subject to tax) in other countries. This approach, known as “worldwide taxation,” is contrary to good tax […]
[…] also has proposed big tax hikes for American companies trying to compete in global […]
[…] also has proposed big tax hikes for American companies trying to compete in global […]
[…] Unfortunately, the American tax system is partially based on the anti-competitive policy of “worldwide taxation,” which means the IRS gets to tax income that is earned – and already subject to tax – in […]
We need to go to the Fairtax. Th world will beat a path to our door instead away from our door
[…] 4. The budget also foresees tax reform, including lower tax rates for households, a 25 percent corporate tax rate, and a move toward territorial taxation. […]
[…] International Competitiveness: Reducing the corporate tax rate will help attract jobs and investment, and the plan also mitigates some of worst features of America’s “worldwide” tax regime. […]
[…] America’s worldwide tax regime, by contrast, U.S.-domiciled companies must pay all applicable foreign taxes when earning money […]
[…] America’s worldwide tax regime, by contrast, U.S.-domiciled companies must pay all applicable foreign taxes when earning money […]
[…] income back to the US by exclusively paying the income tax where the revenue was generated, the US is at a disadvantage in the international economy. America currently loses market share around the world because […]
[…] income back to the US by exclusively paying the income tax where the revenue was generated, the US is at a disadvantage in the international economy. America currently loses market share around the world because […]
[…] Unfortunately, the American tax system is partially based on the anti-competitive policy of “worldwide taxation,” which means the IRS gets to tax income that is earned – and already subject to tax – in […]
[…] *There is an important lesson to be learned when American companies redomicile overseas. Unfortunately, the New York Times wants to make a bad system even worse. […]
[…] Unfortunately, the American tax system is partially based on the anti-competitive policy of “worldwide taxation,” which means the IRS gets to tax income that is earned – and already subject to tax – in […]
[…] Unfortunately, the American tax system is partially based on the anti-competitive policy of “worldwide taxation,” which means the IRS gets to tax income that is earned – and already subject to tax […]
[…] c) In a consumption-base world, there’s territorial taxation and no attempt to impose tax on income earned (and subject to tax) in other countries. But the Haig-Simons tax base assumes “worldwide taxation,” which means that “deferral” is a loophole rather than a way of mitigating a discriminatory penalty. […]
[…] thing I don’t mention in the video is that a flat tax is “territorial,” meaning that only income earned in the United States is taxed. This common-sense rule is the good-fences-make-good-neighbors approach. If income is earned by an […]
[…] also want to eliminate worldwide taxation so American companies can be on a level playing field when competing for market share around the […]
[…] also want to eliminate worldwide taxation so American companies can be on a level playing field when competing for market share around the […]
[…] also want to eliminate worldwide taxation so American companies can be on a level playing field when competing for market share around the […]
[…] he does work at the New York Times, which is tediously left wing (see here, here, here, here, here, here, and here), so we’ll give the newspaper an award for the “Own-Goal […]
[…] thing I don’t mention in the video is that a flat tax is “territorial,” meaning that only income earned in the United States is taxed. This common-sense rule is the good-fences-make-good-neighbors approach. If income is earned by an […]
[…] In an earlier post I argued that U.S. taxation of profits earned outside the U.S. (“worldwide taxation”), causes severe economic damage to the U.S. The U.S. has by far the highest corporate taxes in the world. By far! “Worldwide taxation” creates disincentives to companies bringing their profits back to the U.S. (“repatriating” profits) Imagine if all of this money could be brought back to the U.S. and put to good economic use. Who knows, maybe the government would be encouraged to do so much spending. But, nobody explains this better than Dan Mitchell. […]
[…] In an earlier post I argued that U.S. taxation of profits earned outside the U.S. (“worldwide taxation”), causes severe economic damage to the U.S. The U.S. has by far the highest corporate taxes in the world. By far! “Worldwide taxation” creates disincentives to companies bringing their profits back to the U.S. (“repatriating” profits) Imagine if all of this money could be brought back to the U.S. and put to good economic use. Who knows, maybe the government would be encouraged to do so much spending. But, nobody explains this better than Dan Mitchell. […]
[…] of silly editorializing, such as this bit of amateur political analysis by Thomas Friedman, this foolish look at international taxation by the editors, and this laughable column arguing that America should copy Italy’s fiscal […]
[…] thing I don’t mention in the video is that a flat tax is “territorial,” meaning that only income earned in the United States is taxed. This common-sense rule is the good-fences-make-good-neighbors approach. If income is earned by an […]
[…] July 20, 2012 – Dan Mitchell explained what Obama doesn’t understand about “worldwide taxation” […]
[…] Why does “Worldwide” or “Global Taxation” hurt American companies? Dan Mitchell explains what Obama doesn’t understand about “worldwide taxation“ […]
[…] I don’t mention in the video is that a flat tax is “territorial,” meaning that only income earned in the United States is taxed. This common-sense rule is the good-fences-make-good-neighbors approach. If income is earned by an […]
@crisbd,
I vote for “willful blindness”, thus just like the IRS, we can penalize them with the more severe “willful” penalty instead of the “nonwillful” penalty! Although with how the IRS and the Courts are interpreting “willful blindness’ these days, if you don’t have the IRS.gov as your home page on your browser, you are guilty of being “willfully blind” to all the complex tax regulations that ‘may’ apply for you.
Your mission, is to spend the rest of your life looking for the hidden trap just lurking somewhere in the tax code to be sure that you are fully compliant, and if you are not, a non willful or willful penalty will apply. There is no escaping it.
Yesterday, I learned that Raiffeisen, a local bank, refuses to refinance my mortgage simply because I’m considered to be a “US person”. How is Romney’s territorial taxation for corporations supposed to work while US citizens abroad are being denied mortgages, checking accounts, investment accounts or any financial service simply because they are “US persons”?
I believe that the American idea of “worldwide taxation” is unique to America. Is there any other country which has the arrogance – or do I mean stupidity? – to tax income earned in another country’s territory. “Territorial taxation” is the norm, a policy which helps ensure governments don’t confiscate too much of their citizens’ hard earned income.
So, unless I’m mistaken, it’s America which is out of step with the rest of the world. And this economic disastrous policy, just like Argentine’s economic policies a hundred years ago, will help ensure America’s decline in the world.
Is it willful blindness, or just self sabotage that stops Obama and the apparently economically illiterate from seeing the obvious?
Why does Romney not expand territorial taxation to include individuals? In my view, taxing individuals based in residency is far more important than doing so for corporations. I might even vote for Romney if it includes individuals.
geoff: “Would you extend that to oil companies?”
Would you expect him not to? If so, why?
Reblogged this on Freedom from the tyranny of U.S. citizenship-based taxation for U.S. and dual citizens outside the U.S. and commented:
The arguments apply equally to U.S. citizenship-based taxation of individuals.
Great article!
As a dual citizen abroad I wish the USA move into a residence based taxation for individual taxpayers also. They way the present administration is doing now it is becoming impossible to be an American or Dual Citizen to chose to live and work abroad, even though by doing this they are creating jobs in the mainland. And the great majority of them are not working abroad in order to avoid paying taxes.
So awesome to hear you destroy the notion of tax incentives. Would you extend that to oil companies?
“Since even left-leaning economists generally agree that tax credits for manufacturers are ineffective gimmicks proposed for political purposes…”
Simply put, to oppose territorial taxation, is to support citizenship tax slavery. Your income belongs to me, do matter where in the universe you live! It is killing U.S. export job creation.
Fortunately for the Chinese, they get the connection and fan out around the world unencumbered by draconian tax reporting and penalty regimes to sell Chinese goods and create export jobs back in their homeland. Americans, mostly stay in Kansas, travel on cruise ships, or sit in tank turrets around the world. Not sure how this helps the U.S. economy.