OTEers who enjoy mucking in the weeds with me know that I’m suspicous of a full-blown move to a so-called territorial system of corporate taxation for American multinationals. If you assign a zero tax US tax rate to overseas earnings by our mulitnational companies, as under a “pure” territorial system, it seems axiomatic that they’ll create more jobs abroad.
That’s also the conclusion of a careful piece of work out today by tax economist Kim Clausing in the new edition of Tax Notes. Here’s the punchline:
Under a pure territorial tax system, the tax incentive to locate jobs in low-tax countries would increase significantly, which I calculate would increase employment in low-tax countries by about 800,000 jobs.
Which is a nice way of saying we’d offshore that many jobs from here to there.
I expect this finding to get a lot of scrutiny given the ongoing offshoring debate in the presidential campaigns. Clausing notes that the Obama admin:
…is proposing a minimum tax on foreign income earned in tax havens and a crackdown on corporate practices in which income from an economic activity is booked in low-tax countries while the deductions and credits associated with the same activity are booked in the United States.
The Romney side is proposing pure territorial, where foreign earnings by US firms face no US taxation. “Territorialists” tend to argue that every other country’s already shifted to exactly that type of system. Not so, says Clausing:
Yet most countries with territorial systems have hybrid versions of territoriality…Those hybrid systems include tough antiabuse provisions that discourage the shifting of income and employment to low-tax havens; the result is often a higher tax on foreign income than applies in the United States.
Here’s my take on the offshoring of jobs: it happens…it’s part of globalization. But the last thing you’d want to do from a policy perspective is incentivize more of it!
And that’s what a shift to pure territoriality would likely do.
(See also this new CAP study by Seth Hanlon on these issues.)