TaxProf Blog

Editor: Paul L. Caron, Dean
Pepperdine University School of Law

Thursday, October 4, 2012

WSJ: Obama, Romney, and Territorial Tax Reform

Wall Street Journal editorial:  Obama vs. Volcker, Et Al.:  The President's Advisers Agree With Romney on a Territorial Tax Reform:

Americans are learning that President Obama will do whatever it takes to win re-election, and that includes repudiating reforms that his hand-picked advisers support. The latest example is his opposition to a "territorial" corporate tax policy, which he appears to have jumped on mainly because Mitt Romney has endorsed it.

The issue is whether the U.S. should adopt a territorial levy, which would tax American companies at the rate of the country where they earn income. Most of the world taxes its companies this way, not least because it helps keep home-grown companies globally competitive. The U.S. is a rare exception in taxing U.S. companies at America's 35% corporate tax rate if they decide to repatriate income earned abroad. ...

Yet, believe it or not, Mr. Obama now claims that the territorial reform will lead to the "outsourcing" of some 800,000 U.S. jobs. The White House based this jobs number on a study by economist Kimberly Clausing of Reed College. [A Challenging Time for International Tax Policy, 136 Tax Notes 281 (July 16, 2012).] Too bad it told only half the story. ...

Ms. Clausing's research more or less confirms the obvious, which is that tax rates matter to corporate decision-makers. She acknowledges that the 800,000 lost-job prediction assumes the current U.S. tax rate of 35% (or a 27.1% effective rate). She even makes clear that "if the U.S. effective tax rate were to fall due to changes in tax policy, the calculated jobs responses would be lower."

So the real job killer is the high relative U.S. corporate tax rate. As it happens, Mr. Romney favors cutting the corporate tax rate to 25%.

Advocates of a territorial tax system also say that Ms. Clausing's research overlooks some of the advantages of such a policy. For example, it would help U.S. corporations—like Microsoft, Exxon, Apple and Wal-Mart—compete in overseas markets against German, Chinese and Swiss firms that pay lower tax rates. Numerous studies have found that when U.S. companies are more profitable around the world, American workers also benefit.

All of this explains why the territorial reform has been recommended by many of the members of Mr. Obama's own Council on Jobs and Competitiveness, chaired by General Electric CEO Jeffrey Immelt; suggested as a major tax reform option by Mr. Obama's own Economic Recovery Advisory Board led in 2010 by former Federal Reserve Chairman Paul Volcker; and endorsed by his own deficit-reduction commission co-chaired by Alan Simpson and Erskine Bowles. ...

Our own view is that a territorial tax reform would be less important if the U.S. corporate tax rate weren't so high. In addition to hurting competitiveness, the high rate invites Congress to pass loopholes that offer special favors for the most politically influential companies. The best way to reduce this tax arbitrage is to cut the U.S. corporate rate to the international average of 25%, or preferably much lower. The economically ideal rate is zero because corporations are mainly tax collectors, but that's a different editorial.

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