Paul L. Caron

Thursday, May 5, 2022

WSJ Op-Ed: A Global Tax System Is Good For The U.S.

Wall Street Journal op-ed:  A Global Tax System Is Good for the U.S., by Jason Furman (Harvard):

The U.S. system for taxing international corporate income has long been dysfunctional. It is needlessly complex and distorts business decisions while failing to raise much revenue, thus forcing higher taxes elsewhere to make up the difference. Policy makers have the best chance in generations to reform and improve this system while bringing the rest of the world along. Treasury Secretary Janet Yellen has already helped craft an international agreement signed by more than 130 countries. Congress now needs to do its part and lock it in.

The two approaches to international taxation are worldwide taxation, in which a corporation’s home country taxes its entire global income, and territorial taxation, in which income is taxed only by the country where it is earned. Neither system is perfect, and both inevitably create some distortions.

A worldwide system can impede the competitiveness of American companies by raising their costs relative to those of competitors legally domiciled in other countries. A territorial system, on the other hand, creates an incentive to locate production and shift reported profits overseas.

Before 2017 the U.S. followed a third approach that that combined some of the worst features of both, which I call a “stupid territorial” tax system. It pretended to tax U.S. corporations on their worldwide foreign earnings but in practice afforded them tremendous opportunity to defer those taxes permanently, in effect allowing them to create a territorial system for themselves while leading to massive buildups of overseas income.

President Trump and the Republican Congress reformed this system, replacing it with a hybrid system that included a minimum tax called Global Intangible Low-Taxed Income, or Gilti, for companies that earned a high rate of return and also paid low taxes overseas. This plan took some steps toward a more rational system, recognizing the necessity of a compromise between worldwide and territorial. But it also took some steps backward on rates and in technical details, like allowing companies to apply the minimum tax based on their worldwide average rate instead of on a country-by-country basis. ...

The global minimum tax agreement signals the dawn of a new era of international economic cooperation. It will be good for the countries involved and may even be popular. It is pragmatic and, if anything, relatively minimal in only establishing a 15% rate floor. If Congress doesn’t pass legislation to implement it in the U.S., we could end up with something even worse than the stupid territorial system we had before President Trump.

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