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Think-tank Urges US to Switch to ‘territorial’ Tax System

Thursday, 08 August 2013   (0 Comments)
Posted by: Author: James Politi
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Author: James Politi (FinancialTimes)

US companies would repatriate as much as $1.6tn – or the bulk of the cash they have stashed overseas – if America overhauls the treatment of international earnings in a sweeping reform of the corporate tax code, a Republican-leaning think-tank said on Tuesday.

The American Action Forum – led by Doug Holtz-Eakin, a former director of the Congressional Budget Office during the George W. Bush administration – is trying to build the case for the US to switch to a "territorial” tax system that imposes minimal taxes on foreign earnings.

The US is an outlier among developed countries because it uses a "worldwide” system of tax that imposes levies on foreign earnings when they are brought back to the US of up to 35 per cent, the high statutory US corporate tax rate.

The AAF study – based on a survey of tax officers at the largest multinationals – suggests a switch to a territorial system could lead to the repatriation of between $1.1tn and $1.6tn – a higher amount than previously thought. Over time, this could lead to the creation of 3.5m jobs and boost US gross domestic product by $440bn, the AAF study concluded, using the CBO’s methodology for calculating the economic impact of fiscal stimulus.

"I am firmly of the opinion that we are out of step with the rest of the world and need to move more towards a territorial system,” Mr Holtz-Eakin, who served as economic adviser to John McCain’s 2008 presidential campaign, said. "We’d bring in a lot of funds that are currently offshore and I think that would have a beneficial impact on the US economy and the rate of growth.”

The AAF analysis is likely to be seen as overly optimistic by critics of a shift to territorial taxation, who argue that slashing taxes on overseas profits simply offers more incentives for US multinationals to shift production and employment away from America. In addition, opponents point to the experience of 2004, when Congress and the Bush administration agreed on a one-year tax holiday on overseas profits, and many companies used the funds to buy back stock and pay dividends rather than invest and create jobs. But Mr Holtz-Eakin says that should not matter much.

"I’ve heard that criticism but from a policy point of view we shouldn’t care what the companies did, we should care what happened to the economy. If you buy back the shares the money goes somewhere and does something,” he says, noting that the US economy was stronger in 2005 "after the holiday” than in previous years.

The study comes as talks on tax reform are reaching a critical juncture on Capitol Hill, with committees in both the Democratic-controlled Senate and the Republican-controlled House of Representatives looking to advance legislation before the end of the year. Last week Mr Obama reiterated his plan to cut the corporate tax rate from 35 per cent to 28 per cent, while getting rid of loopholes and using some of the revenue to fund infrastructure projects that would help stimulate the economy. The Obama administration is opposed to a shift to a pure territorial tax system, but may be open to a hybrid system that includes safeguards against the erosion of the US corporate tax base.

The AAF study updates a report based on similar analysis done two years ago on behalf of the US Chamber of Commerce, a big business lobby group, at a time when there was less cash estimated to be sitting offshore. It is now estimated to top $2tn.



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