MY VIEW: Laura Tyson December 2013

CRFB board member Laura Tyson and Berkeley Research Group directors Eric Drabkin and Ken Serwin wrote in Project Syndicate in favor of Baucus's proposal on

As the Senate Finance Committee’s draft proposals suggest, the US should jettison its worldwide approach to corporate taxation and adopt a territorial system for taxing US MNCs’ foreign earnings. Such a system would provide a level playing field that supports US MNCs’ global competitiveness. It would also eliminate the efficiency costs of deferral and boost US MNCs’ repatriation of foreign earnings, with significant benefits for output and employment...

A territorial tax system does have one potential disadvantage: it could strengthen US MNCs’ existing incentives to shift their profits to lower-tax jurisdictions. Competitive cuts in corporate tax rates, the spread of tax havens, and the rising importance of easily movable intangible capital have already made these incentives more powerful. Recent studies find growing segregation between where MNCs locate their real economic activities and where their profits are reported for tax purposes.

Income shifting and the resulting erosion of domestic tax bases pose serious challenges, and countries with territorial systems have adopted tough countermeasures to combat them. If the US moves to a territorial system, it should follow suit. A modern territorial system with adequate safeguards against income-shifting and base erosion is the right approach to taxing the foreign earnings of US MNCs.

No matter what course lawmakers choose in this case, there is much that can be done to make the corporate tax code more competitive. Try our Corporate Tax Calculator and make your own decisions on corporate tax reform.

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"My Views" are works published by members of the Committee for a Responsible Federal Budget, but they do not necessarily reflect the views of all members of the committee.