Corporate Taxes, the Myths and Facts

October 16, 2012

In the midst of a heated presidential campaign, both candidates have decided to agree on one thing: the corporate tax rate needs to be reduced. The United States has the highest corporate tax rate in the world.  Indeed, it stands a full 14 percentage points above the average rate among major advanced economies, says John Engler, president of the Business Roundtable.

With the economy growing at less than 2 percent, it is time for the United States to pursue strategies that will incentivize companies to relocate to the United States and bring with them millions of jobs. However, the high tax rate isn't the only thing keeping companies abroad; it is also the taxation of foreign earnings.

  • Fifty years ago, the United States had 17 of the top 20 global companies.
  • Today, only five companies are in the top 20.
  • This is primarily because the United States is one of the only G-8 countries to operate under a "worldwide" tax system.
  • This means that the United States taxes foreign earnings under U.S. rates if a company seeks to bring those earnings home.
  • Today, U.S. companies have about $1.7 trillion in foreign earnings outside the country.

Rather than working under the "worldwide" tax system, which was established in 1913, the United States should look to what other G-8 and Organization for Economic Cooperation and Development countries are using: a territorial tax system. Such a tax system would tax any foreign earnings at the rate of that local market.

If the United States were to pivot to a territorial tax system, companies would bring trillions of dollars' worth of wealth that could be used for capital investment and other expenditures, which would create economic growth.

Some critics argue that a territorial system would shift jobs overseas; however that logic is entirely faulty considering 85 percent of the world operates under a territorial tax system. Simply lowering the corporate tax rate is not enough. It has to be packaged with a new tax system to make companies want to bring their earnings back home.

Source: John Engler, "Corporate Taxes, the Myths and Facts," Wall Street Journal, October 11, 2012.

 

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