Corporate Taxes: Advantages of a Territorial System

Produced by the Tax Foundation in Washington, D.C.

Script: Whether you know it or not, there's a tax barrier to bringing money into the U.S. It sounds strange, I know, but here's how it works.

Say you're a U.S. company, and you open up an office overseas to serve British customers. Any money you make in Great Britain is taxed at Great Britain's tax rate, in this case, 25%. And as long as you leave that money in Great Britain, you won't have to pay any more taxes on it.

But say you want to bring that money back into the United States. Well, before you can bring that money back to invest in the U.S., you have to pay the difference between England's tax rate and the U.S. tax rate, and since the U.S. has the second-highest corporate tax rate in the world, no matter where you're bringing the money from, you're likely to have to pay an extra tax to bring it home to the U.S.

In this case, you'd have to pay the difference between England's tax rate of 25% and the U.S. tax rate of 35%. It's almost like paying a toll to bring money to the U.S. And that discourages investment in America, year after year. That's money that should be in America -- there shouldn't be a penalty for bringing it home.

So, what can we do? Well, in addition to reducing our 35% tax rate, the answer may lie in what almost every other developed country has already done. It's called a territorial tax system.

In a territorial system, companies only pay taxes on the profits earned here in America. Profits earned in markets outside the United States can be brought home and invested here year after year, without that added penalty. If you want to bring that money back for jobs, expansion, research, development, whatever -- you don't have to pay any additional tax.

And that's not all. Right now, U.S. companies are at a disadvantage when they compete for business abroad. Since their international competitors don't have to pay a toll to move their money back home, the U.S. companies have higher costs in everything they do.

But switching to a territorial tax system would create a level playing field, letting us win more business around the world. And that's good for our workers here at home.

And the increased money invested in the U.S. helps create American jobs and helps grow American businesses. Just a couple ways switching to a territorial tax system can help the American economy.

For more information, visit tax foundation dot org.

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  News & Politics

[Dimitri0809]

Huh?? The EU's world of buisness and knowledge doesn't seem to apply when it comes to who or what knows?? Interestly enough I would of thought the EU would have been just as knowlageble considering the EU's large economy these days since it's 20 year WW2 recovery.

[pfitz007]

Stop blaming your problems on Obama and actually read this again. A company can't magically raise the cost of its products, sorry actually they could by paying higher wages as you mentioned,therefore you Americans get big salaries which is a good thing :) I think you mean raise PRICE, which would be disadvantageous to consumers but would raise profits and therefore taxes, but then again why would there be an incentive to do that

[pfitz007]

You don't pay taxes when you don't have profits so 35% or any rate is irrelevant. You Americans need to stop your relaxed attitude to debt and leveraged buy outs. Take a leaf out of the Germans book, if you can't pay in cash for that fancy car then don't buy it, live within your means

[nfrecker]

Also, of 34 countries in the Organization for Economic Co-operation and Development, twenty-five use territorial systems, with the United Kingdom and Japan having adopted them in 2009.

[nfrecker]

I'm surprised about all of the economic illiterates here. From what I've been hearing people seem to think that it's the super rich who pay the corporate income tax. Corporate incomes do not magically go into rich people's pockets. In order to offset one of the largest corporate income taxes in the world, corporations typically do one of two things. They either raise the cost of their products (hurting product-buying Americans) or cutting costs, such as workers (hurting working-class Americans).

[wflmn321]

there are only a few countries that use the territorial tax system, such as Hong Kong and France, not "almost every other developed country." Lowering the tax rate would fix a lot of the problems described in this video, but a territorial tax system is just putting more money in wealthy hands, and further increasing our national deficit. Don't believe me? Do some research and don't be sheeple!

[JohnnyMo28]

it's much easier and way more effective at stimulating the economy to close loopholes in all forms, lower marginal tax rates slightly, and give tax incentives to corporations who bring money back to the u.s. and use it to hire workers or buy locally-made goods/services.

[JohnnyMo28]

very simple thought process as to why this is a horrible idea. my main company operates out of the u.s.; i do work for clients in the u.s. i take advantage of the legal system, the infrastructure, and other public goods most people pay taxes to support. however, payments are made to a subsidiary in bermuda, with no corporate tax rate, which i then am able, because of a territorial tax system, to being back free of charge.

[bakerjr12]

So you don't want to pay your taxes. Who does? Stop trying to rig the system more than it already is! You suppose this money would come home to hire workers but US companies invest if workers overseas, not here at home! This would only help the investers aka the rich.

[HARRISON PATRICK]

Also, bring back income averaging. I'm self-employed on SS and FERS pension but if I sell a kid's book I might make more in 1 year than the previous year or even the next 5 years so I have to pay income in 1 year that was really the efforts of 5 years.