The Merits of a Territorial Tax System
America’s corporate tax rate is one of the highest in the industrialized world. Currently, the U.S. corporate tax rate is 35 percent, compared with an average of 23 percent for its industrialized competitors. Reform is becoming increasingly urgent as the gap between American and foreign rates widens. Not only are U.S. corporations at a disadvantage when they operate abroad, but high tax rates are driving American companies overseas. For example, Aon Corporation, the Chicago-based insurance company, recently relocated its headquarters to London for tax reasons.
The last major revision of the tax code occurred in 1986, and some of those reforms have been undone by rate increases. America should lower the corporate tax rate and switch to a territorial tax system. This would increase economic growth and allow corporations to compete on an equal footing with competitors abroad. Contrary to what critics assert, lowering the corporate tax rate would not deplete the domestic tax base nor would it result in a loss of American jobs.
This report begins with a brief discussion of America’s current corporate tax system, and then analyzes the presidential candidates’ plans for reform. The taxation of foreign income is one of the most complex parts of the Internal Revenue Code, and this report does not pretend to go into all the details. Rather, it offers an overview of some of the major issues under discussion.
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