Are We Finally Moving to a Territorial System for Corporate Taxes?

October 27, 2011

With a new proposal by House Ways and Means Committee Chairman Dave Camp circulating this week, the prospects for major corporate tax reform are becoming stronger. In particular, the possibility of moving the U.S. from a worldwide to a territorial tax system is being raised not just by Chairman Camp but by contenders for the 2012 presidential election and leading business organizations like the U.S. Chamber of Commerce.

We’ve long been a proponent of moving the U.S. to a territorial system of corporate taxation, and we’re encouraged by the expanding discussions of the topic among political leaders and in the news media.

Earlier this year the Tax Foundation’s President Scott Hodge laid out the most important arguments in favor of a territorial system in the study “Ten Reasons the U.S. Should Move to a Territorial System of Taxing Foreign Earnings.” A listing of those reasons is below.

Ten Reasons the U.S. Should Move to a Territorial System of Taxing Foreign Earnings

1. Parity. The U.S. system must be aligned with our global trading partners.

2. The Experiences of Japan and Great Britain are lessons for the U.S.

3. The premise of the worldwide tax system – capital export neutrality (CEN) – is obsolete when subsidiaries have access to global capital markets and can self-fund their expansion with retained earnings.

4. The worldwide tax system violates the benefit principle of taxation.

5. The U.S. maintains a territorial tax system for foreign-owned companies but a worldwide system for U.S. companies. Mov­ing to a full territorial system will level the playing field.

6. The compliance cost of the current system is excessively high relative to companies’ foreign activities and the revenues raised from taxing foreign-source income.

7. Our current system traps capital abroad – the “lockout” effect.

8. Our high corporate tax rate and worldwide system makes it cheaper for companies to take on debt rather than use their own profits to fund their growth.

9. The current system dissuades global companies from headquartering in the U.S.

10. Eliminating deferral nearly killed the U.S. shipping industry.

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