President Donald Trump and Republican leaders from both houses of Congress are about to undertake the challenge of designing tax reform legislation that can be passed and signed by the president. The concept of territorial taxation is a key idea that should certainly be included in the reform package to create new jobs and boost wages for U.S. workers. This is a key opportunity for President Trump to fulfill his campaign promise to improve the economy for the forgotten middle class Americans who propelled him into the Oval Office.
The U.S. imposes not only the highest top marginal tax rate in the developed world, but also heavily burdensome taxes on international business income. Our tax system deters companies from being headquartered in our country, trapping large amounts of corporate profits overseas. The compliance costs of our tax code are excessive and create huge distortions of economic activity. Key reforms to these aspects of our tax system would lead to economic growth and the creation of many, many new jobs for the American people.
Taxing corporate income on a territorial basis would levy the taxes on income earned within the borders of the country where that income is earned. This avoids the double taxation of the worldwide approach, where corporate income is taxed both on where the income is earned and where the corporation is headquartered.
As the U.S. still largely uses the worldwide taxation system, many countries around the world are changing to taxation on a territorial basis. If the U.S. also does this, it would free up about $1.7 trillion currently trapped overseas. This income could be invested in the U.S. economy, creating many new jobs. Just that change alone in our tax policy would have great benefits to the American people.
While some claim that territorial taxation will increase overseas investment, most economists confirm that the combination of foreign and domestic investment has a synergistic relationship that helps create strong domestic economic growth. Economics studies of countries that have adopted territorial taxation confirms this is true.
It is easy to make a populist argument about worldwide economics based on a zero-sum view, but it is quite myopic to do so. Increased investment, both foreign and domestic, is very much that “rising tide” that “lifts all boats” as referenced by President John Kennedy. That rising tide will help create millions of jobs for Americans. The increased activity that will result from territorial taxation will also increase the revenues obtained from corporate taxes.
Under territorial taxation, corporate income would be taxed in the country where it is earned, and under the version proposed by Rep. Dave Camp (R-MI), the Chairman of the House Ways and Means Committee, 95 percent of foreign income would be exempt from double taxation. Tax policy should be neutral in its effect on how business make investment decisions, a key concept that would be true of a system of territorial taxation. In truth, worldwide taxation decreases investment.
A territorial tax system would increase investment by U.S. companies, allowing them to be more competitive around the world. Eliminating U.S. taxes on foreign earnings would free up that income to be brought back to the U.S., which would also increase investment in our economy.
The benefits of implementing a territorial taxation system should make it a no-brainer for Congress and President Trump. This system should undoubtedly be used because the American people will be far better off as a result.
Edward Woodson is a lawyer and now host of the nationally syndicated Edward Woodson Show, which airs daily from 3 to 6 pm EST on gcnlive.com.