New Study on Impact of Switch to a Territorial Tax System
A new report was released today that examines the likely effects of a change in the U.S. corporate tax system from the current worldwide approach to a territorial approach similar to those used by other developed countries. The report, Implications of a Switch to a Territorial Tax System in the United States: A Critical Comparison to the Current System, was authored by Dr. Laura Tyson, Dr. Eric Drabkin, and Dr. Kenneth Serwin.
The report finds that a switch to a territorial tax system would increase the repatriation of foreign earnings by U.S. multinational companies, generate economic growth and jobs in the United States, enhance the international competitiveness of many U.S. companies, and increase corporate tax revenues, at least in the short run.
“Most other OECD countries have adopted territorial tax systems” said Dr. Tyson, a professor at the Haas School of Business, University of California, Berkeley, and former chair of President Clinton’s Council of Economic Advisers. “The United States, by contrast, has a system based on a worldwide approach that taxes U.S. companies when they repatriate the business earnings of their foreign subsidiaries. To counter the competitive disadvantage of the U.S. approach, U.S. companies have a strong incentive to keep their foreign earnings abroad. That is a major reason why the foreign affiliates of these companies hold an estimated $2 trillion in accumulated foreign earnings. These earnings are not financing investment and job creation in the United States.”
“Our research finds that transitioning to a territorial tax system similar to those used by other advanced industrial countries would generate a significant amount of economic growth and create jobs here in the United States. As lawmakers in Washington look for policies to boost economic growth and job creation, reforming the corporate tax code to allow American businesses to invest their foreign earnings in the United States now and in the future is an opportunity that should be considered.”
The report assumes that a switch to a territorial-based tax system would be accompanied by a transition plan for taxing the stock of accumulated foreign earnings comparable to the plan proposed by Representative David Camp. Under such a plan, over $60 billion in tax revenues would be collected. In addition, the authors find that under the territorial tax system analyzed, U.S. companies would repatriate about $1 trillion of the stock of accumulated foreign earnings. These repatriated earnings would generate additional tax revenues and result in increases in spending and investment that would boost U.S. GDP by at least $208 billion and create at least 1.46 million additional jobs.
The report estimates that in the years following the switch to a territorial system, annual repatriation of future foreign earnings would rise by an estimated $114 billion over their current levels. The increases in spending generated by the additional repatriation would increase U.S. GDP by at least $22 billion a year and create 154,000 additional jobs on a sustained annual basis.