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On Corporate Taxes, “Territorial” Means “Zero”

Several top corporate executives say the United States should adopt a “territorial” tax system.  Translation?  They think the U.S. tax rate on the profits that corporations earn on their overseas investments should be zero.

U.S.-based multinationals already pay much lower taxes on overseas profits than domestic profits.  Giving them a zero U.S. corporate tax rate on their foreign profits would tilt the tax system even more in favor of foreign investment, benefiting multinational companies and their shareholders at the expense of U.S. workers — in other words, kicking U.S. workers when they’re down.

As Jane Gravelle of the Congressional Research Service made clear recently, lowering the tax rate on overseas investments relative to domestic investments would encourage companies to invest more abroad, putting downward pressure on U.S. wages.

A zero percent tax rate on a big share of corporate profits is in the interest of shareholders.   When CEOs push for such a policy, they do so from the perspective of these shareholders.

Congress, however, needs to take larger considerations into account as it debates tax policy — such as the interests of U.S. workers.  Two recent New York Times articles (here and here) showing how the loss of jobs can devastate communities underscore the risks of discouraging investment in the United States.

The Washington Post reports that some manufacturing jobs are starting to return to the United States.  They represent just 13 percent of what was lost during the recent recession and “[m]any of the jobs don’t pay anything close to what they used to,” but still, this is a sign of hope.  Should Washington now step in and eliminate U.S. corporate taxes on the overseas investment destinations these American workers are competing against?

The issue of taxing foreign profits is complex.  That’s one reason why we should discuss it in plain English, such as by making clear that a territorial tax system would cut the U.S. corporate tax on foreign profits to zero.  Policymakers might then be less likely to take steps that would encourage investment overseas rather than here.

Chuck Marr
Vice President for Federal Tax Policy