Joe Biden's Off Base Claim about Territorial Taxation

September 07, 2012

Last night’s speeches at the DNC convention proved to be fertile ground for the fact checkers.  FactCheck.org cites our blog post to debunk Joe Biden’s claim regarding territorial taxation:

Biden: It's called a territorial tax, which the experts have looked at, and they acknowledge it will create 800,000 new jobs — all of them overseas, all of them.

Biden’s referring to Romney’s proposal to move to a territorial system that exempts from tax the foreign earnings of U.S. corporations.  The 800,000 jobs figure comes from one flawed study, as we discuss here and here

Biden and Obama would have the U.S. stick with our current worldwide system that tries to tax the foreign earnings of U.S. corporations after they’ve been taxed abroad.  Because this implies double taxation that could potentially result in tax rates of more than 100 percent, worldwide requires a complex system of foreign tax credits and an international cat and mouse game of tracking where, when, and how profits were earned.  It’s hugely inefficient, raises almost no revenue, and is steadily being rejected by virtually every country on earth.  Most recently Japan and the U.K. have switched to a territorial system, leaving us in the company of only six other developed nations operating under worldwide, including Greece and Mexico.  Adding insult to injury, the U.S. applies the developed world’s highest tax rate, 35 percent, to those foreign earnings. 

This is a travesty acknowledged by every independent advisory board, working group, and federal agency tasked with exploring tax reform, including the President’s Economic Recovery Advisory Board, his Council on Jobs and Competitiveness, and the Simpson-Bowles Commission on Fiscal Responsibility and Reform.  And on jobs, the evidence is abundant that the corporate tax is the most harmful tax to economic growth, and that applies to corporate taxes on earnings no matter where they are earned.  While Biden and Obama have proposed lowering the federal rate to 28 percent, additional state corporate taxes mean this would still leave us with a combined rate about 7 points above the average of developed nations.

As we discuss here, territorial is working out well for other countries, because it allows businesses to engage the world’s markets and expand abroad without additional tax penalties.  This creates jobs at home as well, particularly high-paying management and research and development jobs.   Attempts by Biden and Obama to maintain the status quo will only make American businesses less competitive and exacerbate our current unemployment crisis.

Follow William McBride on Twitter @EconoWill

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