The good news today coming out of the Senate Homeland Security and Governmental Affairs Permanent Subcommittee on Investigations is that Sen. Carl Levin (D-MI) recognizes that something is wrong with our international tax system. The problem though is that his focus is on companies that actually pay taxes and not the tax code itself, which is in desperate need of reform.
The basic problem is fairly simple: U.S. tax laws make it difficult for U.S. companies with worldwide operations to compete. Our “worldwide” system taxes income regardless of where it is earned, unlike most other developed nations that only tax income earned within their borders. As a result, U.S. multinationals generally have a higher tax burden than non-U.S. multinationals — a significant disadvantage when U.S. companies are competing against non-U.S. multinationals and local firms for business in a global marketplace. And, if U.S. companies cannot compete abroad, where 95 percent of the world’s consumers are located, the U.S. economy suffers from the loss of both foreign markets and domestic jobs that support foreign operations.
That’s why the NAM strongly supports moving from the current worldwide tax system to a territorial tax system structured to enhance U.S. competitiveness, not raise revenue. The current focus on tax reform presents a great opportunity to advance a permanent territorial system that would go a long way to improving the global competitiveness of U.S. manufacturers.
Let’s face it, territorial systems are now the international norm. The vast majority of our trading partners have a territorial system of taxing foreign income. Japan and the United Kingdom—two of the largest economies—recently abandoned worldwide taxation systems in favor of a territorial approach. Adopting a tax system that is not more burdensome than the tax systems applying to foreign manufacturing companies is critical to the ability of U.S. manufacturers to compete in the global marketplace. A competitive tax system will impact jobs at U.S. headquarters, increase exports from U.S. manufacturers and improve the efficiency of their supply chains.
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