Senior Director of Economic Policy
A White House official told Politico yesterday that the President doesn’t support a “pure” territorial tax system, under which U.S.-based multinational corporations would face a zero or very low tax rate on their foreign profits. That’s good news — but even a less than “pure” territorial system carries serious risks.
As our new report explains, U.S.-based multinationals already pay much lower taxes on their overseas profits than on their domestic profits. A territorial tax system would give them an even greater incentive to invest overseas rather than in the United States and to shift U.S.-earned profits overseas. That would risk hurting domestic businesses, boosting deficits over the long run, and weakening the economy.
Even “impure” territorial tax systems don’t completely avert these risks. Many countries that supposedly have territorial systems actually have hybrid systems that tax substantial portions of their multinationals’ overseas profits, as well as other “tough” rules to make it harder for multinationals to avoid taxes by artificially shifting profits overseas. These less than pure territorial tax systems are often referred to as “tough” territorial tax systems. Yet, these countries have found that multinationals can still shift profits to tax havens and avoid tax.
This problem is becoming increasingly pressing:
Particularly given the problems that other countries are having with even “tough” territorial systems, the United States shouldn’t move in the territorial direction.