Shifting to Territorial Taxation Would Increase the Offshoring of US Jobs

July 16th, 2012 at 1:57 pm

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.)

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4 comments in reply to "Shifting to Territorial Taxation Would Increase the Offshoring of US Jobs"

  1. Nick Batzdorf says:

    What if we were to offer companies a “repatriation tax moratorium” on money made overseas before a specified date – one that’s already passed (so there’s no incentive to “offshore” jobs) – but in exchange they must deposit half of it in an infrastructure bank for five years?


  2. Misaki says:

    >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.

    Thinking about it a bit more, would that really be such a bad thing if people were willing to “share” jobs (ignoring the structural implications of a flatter income distribution)?

    Revenue from corporate taxes is, presumably, used to benefit people living in a country. People living in a low-tax country would either end up with a lower standard of living or the company would pay for it some other way.

    In a competitive world economy, any ‘value surplus’ to corporations from being able to do this would just end up going back to consumers. Of course, the same could be said about any tax system including the current one; the main consequences of ‘double Irish with a Dutch sandwich’ might just be employment of tax lawyers/accountants and slightly higher barriers to entry since those costs probably relatively static.

    Though this seems wrong…
    >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.

    Job creation without higher government spending, inflation, bubbles, or trade barriers: /ɯoɔ˙ʇodsƃolq˙uɐlduoıʇɐǝɹɔqoɾ//:dʇʇɥ


    • Rima Regas says:

      What a strange world we live in that it’s even necessary to go to such lengths to explain why a territorial tax would promote even more offshoring, or that, while corporations are not people, they still have civic duties to fulfill that go well beyond being answerable to a board of directors or shareholders!

      We (all) should be having conversations about how to fix what needs fixing and not revisiting what used to be conventional wisdom.


  3. Brad says:

    Jared –

    Do you think a case can be made for eliminating the corporate tax rate entirely and making up the revenue in other ways? Examples would include the carbon cap tax and increasing capital gains and dividends taxes above even ordinary income rates (50% is a number that comes to mind but without any analysis behind it)? I’d also love to find a way to tax companies like Wal-Mart that pay their employees so little they qualify for taxpayer-funded programs like SNAP. It seems to me like there are too many loopholes for companies to jump through to lower their tax burden that wouldn’t be available to individual investors when they report capital gains and dividends income. Those incomes are more easily verifiable, correct? Not to mention all the time and money that corporations spend on lobbyists to create those tax loopholes. Maybe this approach would help take some of the influence of money out of Washington? OK, I just made myself laugh with that last one.


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