U.S. Tax System Traps Companies’ Money Overseas

U.S. Tax System Traps Companies’ Money Overseas
October 29, 2012

Matthew Glans

Matthew Glans (mglans@heartland.org) joined the staff of The Heartland Institute in November 2007... (read full bio)

The United States has the highest corporate tax rate among the 34 nations in the Organisation for Economic Co-Operation and Development (OECD) in addition to being one of the few nations still using a “worldwide system.”

Under the worldwide corporate tax system U.S.-based corporations are taxed on the income they make in other countries. Since these companies already pay taxes in their host country, this creates a system of double taxation. Of the OECD countries, eight have a worldwide system, but the top tax rate in these countries is considerably lower than the top U.S. corporate tax rate.

In order to avoid the high corporate tax rate imposed by the United States, many American-based companies operating internationally have been keeping their foreign earnings in subsidiaries overseas. These policies have resulted in billions of dollars of capital being kept in more tax-friendly countries.

Economic ‘Berlin Wall’

Tax Foundation President Scott Hodge said he doesn't think he can improve on a comment he made on the topic in a March 24, 2011 blog post: “The high U.S. corporate tax rate and our worldwide tax system have erected an economic Berlin Wall around the country, discouraging companies from reinvesting their foreign earnings back home. For most companies, the 35 percent toll charge for bringing that money home is too stiff.”

Some lawmakers have proposed a tax holiday to allow U.S. companies to bring their foreign earnings back to the United States. These efforts would be a temporary respite from the problems created by the outdated U.S. corporate tax system.

Territorial Advantage

A more expansive reform would be for the United States to switch to a territorial tax system of the kind used by many nations around the world. Under a territorial tax system, the United States would tax only corporate income generated within the nation, and not income from foreign subsidiaries, thus eliminating the double taxation. Many territorial tax proposals would retain certain types of financial assets held by foreign subsidiaries as taxable earnings, to prevent abuse and erosion of the tax base.

According to an August 2012 Tax Foundation "Special Report," moving to a territorial system would “free the $1.7 trillion dollars currently locked out of the U.S, place U.S.-based companies on equal footing with competitors in every market, reduce complexity and compliance costs, reduce the incentive to reincorporate abroad, and could be accompanied by improvements to anti-abuse protections.”

The current worldwide tax system has placed the United States at a competitive disadvantage to other nations with lower, less complicated corporate tax rates. Switching to a territorial system would make the United States more competitive by bringing foreign earnings back to the America for investment while encouraging more companies to set up headquarters here.

Internet Info

"A Global Perspecitve on Territorial Taxation," Tax Foundation "Special Report" No. 202: http://heartland.org/sites/default/files/dittmer_sr202_0.pdf

Matthew Glans

Matthew Glans (mglans@heartland.org) joined the staff of The Heartland Institute in November 2007... (read full bio)