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What Obama and the New York Times Donít Understand about Worldwide Taxation
Townhall.com ^ | July 21, 20, 2012 | Daniel J. Mitchell

Posted on 07/21/2012 6:22:36 AM PDT by Kaslin

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.


TOPICS: Business/Economy; Editorial; Foreign Affairs
KEYWORDS:

1 posted on 07/21/2012 6:22:44 AM PDT by Kaslin
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To: Kaslin
I really like a national sales tax. If you want to sell stuff inside the US, then a tax will be paid -- at the retail level. Consumers should fund the government, not producers.

I oppose all other taxes.

2 posted on 07/21/2012 6:32:10 AM PDT by ClearCase_guy (Roger Taney? Not a bad Chief Justice. John Roberts? A really awful Chief Justice.)
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To: ClearCase_guy

A sales tax is the only one that ensures that everyone pays, for the most part, even unregistered immigrants.


3 posted on 07/21/2012 6:56:37 AM PDT by Paradox (I want Obama defeated. Period.)
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To: ClearCase_guy
I really like a national sales tax.

I agree, but the trick is in getting from here to there. As long as government's share of spending is so large, the money has to come from somewhere. My fear is that we'd get the national sales tax without getting rid of the income tax. Heck, there's already a lot of talk of emulating the VAT as an addition to the current system.

4 posted on 07/21/2012 7:24:06 AM PDT by Pearls Before Swine
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To: Kaslin

Worldwide taxation is just another part of international communism.


5 posted on 07/21/2012 7:37:19 AM PDT by TexasRepublic (Socialism is the gospel of envy and the religion of thieves)
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To: Kaslin

Worldwide taxation is why many work for a one world government.


6 posted on 07/21/2012 8:40:22 AM PDT by Vaduz
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To: ClearCase_guy

I like tariffs. High tariffs worked well to fund the federal government and allow the USA to build its industrial infrastructure up to 1914.

Since 1988, when our great infatuation in free trade with mercantilist nations began, we’ve seen our manufacturing base gutted, the standard of living for the average American decline, Wall Street shift from financing real productive assets (factories, planes, railroads, ships) to speculating wildly with financial pieces of paper no one understands. Not to mention the drug addiction and chronic unemployment that decimates communities when factories close and the middle class jobs go away. The loss of middle class employment results in increasing demands for government social spending which then drives higher taxes and less economic investment.

The USA has the population scale and abundant resources to be largely self sufficient again as we were in the first three quarters of the 20th century. Raise tariffs and bring back US manufacturing and jobs.. Our current trade policies are an abysmal failure. In 20 years we’ve financed the industrialization of China, a major economic enemy, while destroying the vibrancy of our own economy. Slap a 30% tariff on imports and you’ll see the Chinese economy tank, along with their aggressive military buildup. Combine the new tariffs with the proper regulatory environment and lower corporate plus individual tax rates and we’ll see a renaissance of investment in US economic investment and an upsurge of employment.


7 posted on 07/21/2012 9:32:32 AM PDT by Soul of the South
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To: Kaslin
Let's hope this subject, Obama's support for a global tax (meaning the UN decides) structure vs. this so-called "territorial taxation", comes up in a debate. I'm fairly certain the reaction among the voting public, and probably the audience where ever the debate is held, would startle the Democrats and the press. It would be "interesting" to watch Obama's reaction to massed audience boos in real time.

Unless I'm mistaken, this conceptual dispute was the motivation for Americans' original conversion from Subjects to Citizens (with a few thousand British and Continental Army corpses in between).

8 posted on 07/21/2012 9:41:47 AM PDT by katana (Just my opinions)
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To: Kaslin
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.

That free market competition thing is hell on you Marxists, isn't it Zer0?

9 posted on 07/21/2012 9:50:53 AM PDT by RatRipper (Obama, YOU LIE!!! . . .again and again and again and again, ad infinitum. . . .)
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To: Soul of the South
Raise tariffs and bring back US manufacturing and jobs.

No, raise tariffs and wipe out millions of existing US jobs in import-dependent small and medium-sized companies, while doing nothing to eliminate the union thuggery and excessive regulation that drove our manufacturing base offshore in the first place.

There is no quick fix to the offshoring of heavy manufacturing and no fix at all to the offshoring of low-priced product manufacturing. That ship has sailed forever.

10 posted on 07/21/2012 9:04:38 PM PDT by Mr. Jeeves (CTRL-GALT-DELETE)
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