The United States Chamber of Commerce released an outline of its proposals for corporate tax reform, and chief among its wishes is a so-called “territorial” tax system that would exempt most foreign profits earned by American multinational corporations from taxation in the U.S.
The territorial system has been the subject of recent lobbying efforts from coalitions of corporations that say such a system would increase competition with foreign companies and also investment and job creation in the United States. The territorial system was a favorite of Republican presidential candidate Mitt Romney and is supported, in some form, by Rep. Dave Camp (R-MI), the top tax-writer in the House of Representatives.
Despite claims from business groups, studies show that a territorial system would simply make it easier to store profits in offshore tax havens and avoid American taxation, an incentive corporations don’t need. The largest corporations are already holding nearly $1.5 trillion in offshore tax havens like Bermuda, the Cayman Islands, and Ireland, even though they do very little business in those countries. Those tax avoidance schemes cost individual taxpayers and small businesses hundreds of dollars each annually and have also helped crimp state budgets.
One study estimates that the increased offshoring that would result from a territorial system would result in the creation of 800,000 jobs in other countries, potentially displacing investment and job creation in the U.S.
Corporations’ argument for such a system stems from their claims that they are paying the highest corporate tax rate in the world. But while the U.S. does indeed have the highest marginal corporate tax rate, the effective corporate tax rate dropped to a 40-year low in 2011 even as profits rose to a 60-year high. Only Iceland, in fact, collects less in corporate taxes as a share of the economy among industrialized nations.