New Zealand’s Lesson for U.S. Business on Taxes

June 20, 2013

Spurring Growth and Investment with Smart Policy

Washington, D.C., June 20, 2013—The U.S. economy would see greater growth and prosperity under a legal system that only taxed corporations on profits earned at home, and the recent history of New Zealand provides a testimonial in favor of this policy, according to a new analysis by the nonpartisan Tax Foundation.  

American corporations are currently subjected to taxes on income they earn both at home and abroad, a system known as “worldwide” taxation. Economists have long argued that a switch to taxing only profits earned domestically, a “territorial” system, would spur economic expansion and job growth. New Zealand, which moved from a territorial system to a worldwide system and then back again, saw much less economic success during the intervening years.

Currently, the overwhelming majority of developed nations operate a territorial tax system for international companies. Many of those have, under the weight of accumulating economic evidence, made the switch since 2000. These include some of the largest economies in the world, such as Germany, Japan, and the United Kingdom.

New Zealand is one of only two developed countries, the other being Finland, to have switched in the other direction, from a territorial to a worldwide system. New Zealand, however, went one step further by ending the ability of corporations to even temporarily defer payments on foreign income, as U.S. companies are currently allowed to do. The result was a twenty year stagnation in foreign investment at a time when the rest of the developed world was seeing foreign investment grow dramatically. Both eventually returned to a territorial tax system for competitiveness reasons.

“The New Zealand experience shows that ending or limiting deferral in the United States, as President Obama and others have proposed, would likely have severe economic downsides,” said Tax Foundation Chief Economist William McBride. “Instead, as New Zealand eventually did in 2009, the U.S. should implement a territorial system that exempts foreign earnings.”

Tax Foundation Fiscal Fact No. 375, “New Zealand’s Experience with Territorial Taxation” by William McBride, is available online. Previous Tax Foundation studies on territorial taxation have focused on The Netherlands, Germany, the United Kingdom, Japan, and Canada.

The Tax Foundation is a nonpartisan research organization that has monitored fiscal policy at the federal, state and local levels since 1937. To schedule an interview, please contact Richard Morrison, the Tax Foundation’s Manager of Communications, at 202-464-5120 or borean@taxfoundation.org.

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