USA loses capital because of global taxing policy

November 6, 2003

Free Market Foundation

U.S. businesses pay a tax of 35 percent on income earned by their foreign subsidiaries because the United States is one of the few countries that taxes income wherever it is earned. Most countries allow income to be taxed in the places (“territory”) where it is earned. The United States has corporate tax credits for income earned and taxed abroad, but those credits have many restrictions and limits.

Reducing the tax on corporate income earned abroad would encourage them to invest that money in the U.S.:

Just a 12-month moratorium on the taxes would induce companies to bring $300 billion or more of this cash home estimates J.P. Morgan.

And economist Allen Sinai estimates it would boost Gross Domestic Product by 0.2 percent in 2004 and 0.9 percent in 2005, along with increases in jobs and capital spending.

The Congress’ Joint Tax Committee estimates a one-year tax-free repatriation of earnings would lose only $4.4 billion in revenue over 10 years.

Permanent replacement of worldwide taxation by territorial provisions would have even greater positive economic effects, say economists.

Source: Editorial, Bring It Home, Wall Street Journal, October 28, 2003.

For text (WSJ subscription required) http://online.wsj.com/article/0,,SB106730796567843900,00.html

For more on Corporate Taxes http://www.ncpa.org/iss/tax/

FMF Policy Bulletin\28 October 2003