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Pepperdine University School of Law

Saturday, November 9, 2013

Implications of a Switch to a Territorial Tax System

BRGBerkeley Research Group, Implications of a Switch to a Territorial Tax System in the United States: A Critical Comparison to the Current System:

Berkeley Research Group released a new report today that examines the likely effects of a change in the U.S. corporate tax system from the current worldwide approach to a territorial approach similar to those used by other developed countries. ... The report finds that a switch to a territorial tax system would increase the repatriation of foreign earnings by U.S. multinational companies, generate economic growth and jobs in the United States, enhance the international competitiveness of many U.S. companies, and increase corporate tax revenues, at least in the short run.

(Hat Tip: Bruce Bartlett.)

Tax, Think Tank Reports | Permalink


Cute. This was written by a for-profit outfit hired by General Electric...

Posted by: Jeremy Bearer-Friend | Nov 9, 2013 3:13:08 PM

"The research and analyses performed in preparing this paper were sponsored by General Electric Company and the Alliance for Competitive Taxation." I never know quite what to think about corporate-sponsored research. Whether GE pays significant US taxes is contested, but many believe that its effective tax rate is quite low.

We do know that under a territorial system, all GE has to do to pay minimal US taxes is to move its plant and payroll elsewhere. Why this is would be good for the rest of us escapes me.

Posted by: Theodore Seto | Nov 9, 2013 6:10:52 PM

Jeremy, you've said it very very well. "Cute. This was written by a for-profit outfit hired by General Electric..."

In as few words as possible, this is a terrible piece written with an agenda and a preordained conclusion. Instead of comparing a territorial system to a full-inclusion system (the other currently realistic approach), they compare it to solely the current deferral system with all its faults. This is frankly a meaningless comparison if one is truly trying to find the best answer for America's future.

Because of their deferral system vs territorial system approach, the authors repeatedly maintain that a territorial system's even stronger incentive to shift jobs and IP out of the US won't be significant. MNCs can do it under the current deferral system; a little more incentive under the new system won't change their behavior much. They comment: "Given that income shifting occurs and is encouraged under the current system, the analysis of a switch to the stylized territorial system should focus on its impact on income that has not or will not shift in the future under the current system."

With this current deferral system vs territorial system focus, the report pretty much ignores important societal and tax policy issues, such as:

Neutrality--Fairness in application of US tax on MNCs versus pure domestic businesses (which includes the bulk of small and medium sized businesses); territoriality creates even more unfairness by imposing full US taxation on a pure domestic business in Poughkeepsie while imposing zero tax on MNCs doing the exact same thing in Singapore (this also puts pure domestic business at a serious competitive disadvantage with respect to US-based MNCs...this is a competitiveness issue that I personally believe is more relevant and important to correct than the claimed lack of competitiveness that our MNCs say they have versus foreign-based MNCs)

Broadening the Tax Base--If we want to lower rates for all (and to make the US itself more competitive), broadening the tax base is a no-brainer; territoriality decreases the tax base and forces a higher domestic tax rate or reduction in incentives like accelerated depreciation to maintain overall revenue neutrality

Discouraging Game Playing--Our current deferral system strongly motivates our MNCs to set up convoluted structures to divorce income from the activities that create it; a territorial system maintains and even strengthens this already strong motivation

In contrast to a territorial system, a full-inclusion system truly deals with these important policy issues.

Posted by: Jeff Kadet | Nov 10, 2013 4:06:12 AM