By John Engler
October 12, 2012
U.S. companies don't get a tax break for moving plants
overseas. They are, however, socked with an extra bill for
bringing home earnings.
America's corporate tax rate is too high and needs to
come down. Who says so? President Barack Obama and Gov.
Mitt Romney-and America's jobs creators who believe
lower rates are a necessity for economic growth. At last
week's presidential debate, the two candidates agreed
on the need to reduce the U.S. corporate tax rate, now the
highest in the world and a full 14 percentage points above
the average rate among major advanced economies.
What the candidates didn't agree on was whether there
is a deduction in the U.S. tax code that encourages
companies to move plants overseas. Mr. Obama contended that
such a deduction exists. Mr. Romney said, "I've
been in business for 25 years and I don't know what
you're talking about."
According to the nonpartisan congressional Joint Committee
on Taxation, there are no specific tax credits or
deductions for moving plants and jobs overseas. While the
tax code provides a deduction for all business expenses,
including plant-closing costs, severance pay and worker
retraining, the simple fact is that businesses don't
make relocation decisions on the basis of a tax deduction.
One couldn't blame them, though, for looking enviously
at companies overseas in countries where the corporate tax
rate is more conducive to growth. The high rate in the U.S.
hurts the economy, which is currently growing at less than
2%, frustrating millions of American workers looking for
A high corporate tax rate is not the only burden on doing
business in the U.S. Also embedded in the tax code is an
antiquated system that governs U.S. taxation of foreign
earnings. Today the U.S. is unique among the G-8 countries
in taxing foreign earnings if a company seeks to bring
those earnings home. This "world-wide" tax system
has been in place since the establishment of our income-tax
system in 1913.
The system has simply not kept up with the demands of
today's global marketplace, where 95% of the
world's consumers live outside the U.S. All other G-8
countries-and 28 of the 34 member nations of the
Organization for Economic Cooperation and Development-use
"territorial" tax systems. This means a
company's sales in foreign markets are taxed at the
rate of that local market-the same rate borne by other
By contrast, under the current U.S. system, after an
American company pays that local tax, it finds the Internal
Revenue Service waiting with a big tax bill when the
company tries to bring foreign earnings back to the U.S.
Why? Because America's tax law requires the payment of
an additional tax-generally the difference between the U.S.
rate and the tax rate in the foreign market.
According to J.P. Morgan, U.S. companies today control $1.7
trillion in foreign earnings held outside the U.S.,
earnings they don't plan to repatriate. If the U.S.
were to adopt a territorial system, it would eliminate the
tax barrier that discourages American companies from
bringing their money home where it could be used for
capital investment, R&D dividends or other ways to support
International tax rules made little competitive difference
50 years ago when American companies dominated world
commerce-the U.S. had 17 of the top 20 global companies
ranked by sales. Compare that with 2012, when just five
American companies are in the top 20. Today, outdated U.S.
tax rules make it harder for U.S. companies to succeed
against international competitors.
Some suggest that reducing the current 35% U.S. corporate
rate to the 25% average in the Organization for Economic
Cooperation and Development would be enough to eliminate
the anticompetitive effects of our international tax rules.
But foreign countries also make aggressive use of
investment incentives, lowering their effective corporate
tax rate below the statutory ones.
Thus, even if we reduce the U.S. statutory corporate tax
rate to the average 25%, the U.S. companies would still
face higher taxes here under the current world-wide tax
system if they brought foreign earnings home.
Other countries have recognized the challenges of
international trade, adopting territorial tax systems even
as they lowered corporate tax rates. Japan and the United
Kingdom recently moved to territorial systems with the
explicit goal of helping their companies compete more
effectively around the world.
Detractors sometimes claim that repatriated funds would do
little to help the U.S. economy, contending that the
dollars would merely lead to share buybacks. This narrow
train of thought overlooks the likelihood that shareholders
would redeploy those funds to the benefit of domestic
investment, consumption and hiring.
Critics make another thinly based claim: Moving to a
territorial system will prompt U.S. companies to shift jobs
overseas. Really? The 85% of developed nations that have
opted for territorial systems surely don't want to put
their own citizens out of work.
The dual components of corporate tax reform-a reduction in
the U.S. corporate tax rate and a modernized international
tax system like those of our trading partners-are crucial
to regaining U.S. economic growth. Only with growth will
American workers reap the benefits of the rapidly growing
consumer markets around the world. On that, also, Messrs.
Obama and Romney should agree.
Mr. Engler is president of the Business