By Curtis S. Dubay (The Heritage Foundation):
Abstract
There is widespread agreement that the current U.S. tax system for multinational businesses destroys jobs and suppresses wages for U.S. workers. However, there is a sharp division about how to fix it. One side argues for strengthening the current worldwide system. The other side argues for a territorial system. Strengthening the worldwide system would drive U.S. businesses and their jobs overseas. The U.S. needs to abandon the worldwide system because it is not neutral and therefore reduces investment by U.S. firms. A territorial system, in contrast, is neutral to investment and therefore does not discourage it. Congress should scrap the worldwide system and move to a territorial system like almost every other developed nation uses. More investment would be a boon to U.S. workers because it would increase job creation and raise wages.
An intense debate is raging over the proper way to repair the broken system the U.S. uses to tax its international businesses. There is widespread agreement that the current system destroys jobs and suppresses wages for U.S. workers. However, there is a sharp division about how to fix the system’s shortcomings. One side argues for strengthening the current worldwide system that taxes U.S. businesses on the income they earn in foreign countries. The other side argues for a territorial system, which would mostly exclude foreign-earned income from U.S. taxation.
Strengthening the worldwide system would be disastrous for U.S. workers because it would drive U.S. businesses and their jobs overseas. The U.S. needs to abandon the worldwide tax system, not strengthen it, because it is not neutral and therefore reduces investment by U.S. firms at home and abroad. In stark contrast, a territorial system is neutral to investment, meaning that it neither discourages nor encourages the amount or location of investment.
Congress should scrap the worldwide system and move to a territorial system like almost every other developed nation has. Such a policy improvement would be a boon for U.S. workers by removing the worldwide system’s disincentive to invest and its barriers to international competitiveness.
The remainder of this study can be found here.