President Obama today will criticize presumptive GOP nominee Mitt Romney for his support of a territorial tax system which, according to a commentary in the Tax Notes newsletter by Reed College economist Kimberly Clausing, “would increase employment in low-tax countries by about 800,000 jobs.”
The president will make the argument today that those overseas jobs would be created at the expense of jobs created in the U.S.
Romney is far from alone in endorsing a territorial tax system, which would allow the profits made by an American corporation in another country to escape U.S. taxation. In fact, a number of advisers to the president support the idea as well – including members of the President’s Export Council, the commission the president set up to recommend ways to reduce the deficit, and members of his Council on Jobs and Competitiveness.
In a letter to President Obama on December 9, 2010,the chairman of his Export Council, Boeing CEO Jim McNerney, writing on behalf of the private-sector appointed members of the Council, called for a “competitive territorial tax system for the United States,” one that “should broadly follow the practice of our trading partners and should not be designed to raise new revenue, or to destabilize the U.S. corporate tax base, but rather to make the US tax system more competitive with its major trading partners.”
“The rest of the world increasingly uses territorial systems under which foreign earnings – taxed once in the foreign country – can be brought back for reinvestment in the domestic economy without incurring additional home country tax,” McNerney wrote, noting that of the 34 countries in the Organisation for Economic Co-operation and Development, twenty-five use territorial systems, with the United Kingdom and Japan having adopted them in 2009. “The United States, along with only five other OECD countries, (Chile, Ireland, Korea, Mexico and Poland) use so-called worldwide tax systems in which foreign earnings are subject to domestic tax when remitted to the domestic economy,” he wrote. “Importantly, all five nations have a much lower corporate tax rate than the U.S. Expansion abroad by U.S. companies is vital for establishing export platforms for U.S.-produced goods and expanding the scope of domestic investments in research and other high-paying headquarters’ operations.”
The Council’s push for a territorial system was echoed one year later by President Obama’s National Commission on Fiscal Responsibility and Reform, better known by the surnames of its bipartisan co-chairs, the Simpson-Bowles Commission.
“The U.S. is one of the only industrialized countries with a hybrid system of taxing active foreign-source income,” that report, issued in December 2010, noted in its section on Tax Reform.”The current system puts U.S. corporations at a competitive disadvantage against their foreign competitors. A territorial tax system should be adopted to help put the U.S. system in line with other countries, leveling the playing field.”
Eleven of the 18 members of the Simpson-Bowles Commission voted to endorse the final blueprint, but a supermajority of 14 votes was needed for a formal endorsement of the commission for its own report.
In January of this year, the president’s Council on Jobs and Competitiveness issued its end-of-the-year report for 2011, in which it was noted that “Many members of the Council agreed that the United States should move to a territorial system of taxing corporate income akin to the practices of the other developed economies.”
The report stated that such a tax system “would eliminate the so-called lock-out effect in the current worldwide system of taxation that discourages repatriation and investment of the foreign earnings of U.S. companies in the United States. The current worldwide system makes investing these earnings in the United States more expensive from a tax point of view than reinvesting them abroad where they are not subject to additional corporate tax. These members believe that a territorial system would enhance the ability of U.S. companies to acquire foreign companies and would eliminate tax incentives of U.S. multinationals to merge with or sell their foreign operations to foreign companies. This would also reduce the vulnerability of domestic firms to takeover bids by foreign firms operating with lower tax rates. According to this view, a lower corporate tax rate and the adoption of a territorial system would increase the competitiveness of U.S. companies relative to their foreign counterparts in the United States and elsewhere, adding to the U.S. jobs that are needed to grow and support global growth.”
Not everyone agreed, however, with the report also stating that “Some members of the Council, however, disagree with this point of view, arguing that a territorial system of taxing corporate income would strengthen incentives for companies to move investment and employment to lower-tax jurisdictions. They believe that, if the United States adopts a territorial system of taxation, it must be designed to prevent U.S. firms from exploiting U.S. markets while avoiding U.S. tax. They believe the U.S. corporate tax system must be designed to prevent such behavior. We are hopeful that such policy differences can be resolved as part of a broader, comprehensive tax reform initiative by policymakers. But with limited time devoted to these tax questions, the Council did not try to negotiate a consensus on territoriality as part of its work.”
The policy disagreement is one that the president seeks to use to not only paint Romney as “part of the problem,” as the latest Obama campaign ad describes him, but to highlight questions about Romney’s own history of overseas investments. The Romney campaign has insisted Romney avoided no taxes with his investments in the Cayman Islands and Bermuda.