New Special Report: Eliminating Tax Deferral Would Make U.S. Less Competitive Internationally

Tax Foundation Senior Fellow Robert Carroll, Ph.D., has authored a new Special Report, “The Importance of Tax Deferral and A Lower Corporate Tax Rate,” which argues that the Obama administration’s plan to curtail tax deferral for income earned abroad by American businesses would harm U.S. competitiveness in low-tax countries.

Currently, the U.S. system for taxing foreign earnings blends aspects of both a worldwide and territorial system. U.S. multinational corporations are taxed on their worldwide income, but active earnings are not taxed until repatriated to the U.S., minus credits claimed for foreign taxes paid. Reforming the corporate tax system requires balancing neutrality between foreign and domestic production with international competitiveness, Caroll notes.

According to the report, the United States is the only large economy that taxes corporate income worldwide with a tax rate exceeding 30 percent. During 2009, both Great Britain and Japan enacted territorial systems, giving their multinational companies a major tax advantage over U.S.-based firms that are saddled with a worldwide system. Over 80 percent of developed nations now have territorial systems.

For more information, see Tax Foundation Special Report, No. 174, “The Importance of Tax Deferral and A Lower Corporate Tax Rate.”