Illinois continues to struggle with its budget. The state’s most recent stopgap budget expired on December 31, 2016. To perhaps break up the political logjam, Illinois senators of both political parties have begun...
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- Worldwide Taxation is Very Rare
Worldwide Taxation is Very Rare
This week the President released his fiscal year 2016 budget. One of the major changes to the tax code in the budget is its alteration of the U.S.’s international corporate tax system.
As we wrote earlier this week, it represents a significant change to how U.S. corporations will pay taxes to the United States on their foreign income. Currently, U.S. corporations are required to pay taxes to the U.S. government on their worldwide income. However, they are able to defer the U.S. taxation on their foreign income as long as they reinvest that income in ongoing activities. They pay the U.S. tax when they repatriate their earnings. This system allows corporations to compete internationally, but places a significant burden on corporations that want to reinvest income back into America.
The president’s proposal would essentially institute a fully worldwide corporate tax system that subjects foreign income of corporations to domestic taxation without deferral and other slight alterations. Specifically, foreign income would be subject to a minimum tax of 19 percent on a current basis (no deferral), which is slightly lower than the proposed 28 percent domestic rate. It would limit the foreign tax credit to 85 percent of the taxes paid overseas. Finally, it would create an “allowance for corporate equity,” which would exempt a predetermined amount of foreign income from domestic taxation.
Moving to a full worldwide system would put U.S. corporations at a further competitive disadvantage. Taxing foreign income penalizes expanding both foreign and domestic investment, which are compliments (making foreign consumers rich enough to buy our stuff can only be a good thing). This plan would also introduce more rules and complexity to an already burdensome system.
Not only is this proposal poor policy, a worldwide international tax system such as this is pretty rare throughout the world. Over the last 100 years, developed countries have been moving away from worldwide taxation of corporate income towards a more superior territorial system. A territorial tax system exempts a domestic multinational corporation’s foreign income from domestic taxation.
At the beginning of the 20th century, 33 countries had a worldwide tax system. That number slowly dropped to 24 countries by the 1980s. By the 2000s, the number of countries switching to territorial systems accelerated, with more than 10 countries switching in 10 short years. Nearly all developed countries have moved to the superior territorial tax system. Today there are only 6 countries that tax corporations on their worldwide income. The President’s proposal would double-down on the U.S.’s current system and push the United States further out of line with the rest of the developed world.
For more on the President’s worldwide corporate tax proposal see here.
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