Bill Clinton Calls for a Territorial Tax System

At the Clinton Global Initiative meeting earlier this week, former President Bill Clinton called for a lower corporate tax rate, saying that the average corporate taxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. rate across the OECD (25.3 percent) provides a good target for where our corporate tax rate should be. But in his talk—which included discussion of corporate inversions—he also outlined the argument for a move to a territorial tax systemA territorial tax system for corporations, as opposed to a worldwide tax system, excludes profits multinational companies earn in foreign countries from their domestic tax base. As part of the 2017 Tax Cuts and Jobs Act (TCJA), the United States shifted from worldwide taxation towards territorial taxation. . From his talk (emphasis added):

“Meanwhile I think the treasury secretary Jack Lew and people in charge of tax collection have a duty to collect as much revenue as they can from companies, particularly that earn it in America. But nothing that has been done will prevent the treasury from collecting taxes – wherever these companies can set up shop in Palau if they want to. They will still have to pay the American tax rate on the money they earn in America. And we have to come to terms with the fact that everyone else in the world has stopped taxing on the difference between what their companies earn in a different country and at home. So we normally think of Norway, Sweden, Denmark, Finland as very socially liberal, unifying countries that they would always have higher taxes than we do. They do as a percentage of GDP but don’t tax the overseas earnings of their own companies. So we need tax reform.”

As the former president lays out in the comments above, a territorial tax system would only tax U.S. corporations on income they earn in the United States. All foreign income would be taxed at foreign tax rates and not be subject to the U.S. tax.

This is different treatment than the current system of worldwide taxation. Under a worldwide tax system, U.S. corporations must pay U.S. corporate taxes on foreign income when that income is brought back to the United States. This creates a “lock-out” effect where U.S. corporations reinvestment or hold income overseas to avoid the additional tax.

If the U.S. were to shift to a territorial tax system, as Clinton suggests, the U.S. would join the vast majority of OECD countries. Currently 28 of the 34 OECD countries operate under some form of territorial tax systems.

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