Skip to comments.What Obama and the New York Times Donít Understand about Worldwide Taxation
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 Romneys 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 Romneys support for a so-called territorial tax system, in which the overseas profits of American corporations would escape United States taxation altogether. Its 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 dont 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, lets set that topic aside and focus on the issue of territorial taxation.
Or, to be more specific, lets 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 its 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, Americas 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, theyre somewhat right and theyre totally wrong. Heres what Ive said about that issue.
If a company can save money by building widgets in Ireland and selling them to the US market, then we shouldnt be surprised that some of them will consider that option. So does this mean the Presidents 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. companys 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, Americas tax code is driving jobs and investment to other nations. Americas high corporate tax rate is a huge self-inflected wound for American competitiveness.
Getting rid of deferral doesnt solve any problems, as I explain in this video. Indeed, Obamas policy would make a bad system even worse.
But, its also important to admit that shifting to territorial taxation isnt 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.
I oppose all other taxes.
A sales tax is the only one that ensures that everyone pays, for the most part, even unregistered immigrants.
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.
Worldwide taxation is just another part of international communism.
Worldwide taxation is why many work for a one world government.
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.
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).
That free market competition thing is hell on you Marxists, isn't it Zer0?
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.