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Biden Lashes Out Against Proposal to Move Toward Territorial Tax System

By Brett Ferguson
Publication Date: 09/10/2012

Vice President Joe Biden used part of his Sept. 6 remarks at the Democratic National Convention to attack a Republican proposal to move toward a territorial system of international taxation, claiming the policy would result in 800,000 jobs—“all of them overseas.”

Taking a jab at Republican presidential nominee Mitt Romney, Biden said Romney's statement that he will take a jobs tour as president is “fascinating” since “with his support for outsourcing, it's going to have to be a foreign trip.”

The notion of moving to a territorial system is being considered with tax reform as a way to help American companies be more competitive with foreign firms.

Romney, House Ways and Means Chairman Dave Camp (R-Mich.), and Senate Finance Committee Chairman Max Baucus (D-Mont.) have all suggested varying degrees of support for a move to some type of territorial tax system.

Biden's estimate that 800,000 jobs would be created overseas from a territorial tax system—a statement also made by President Obama in July—is based on a June 2012 study done by Reed College economics professor Kimberly Clausing. Clausing's study, however, is of a shift to a “pure territorial system” in which no overseas earnings would be taxed by the United States.

Analysts said Biden's speech exaggerates the issue since the only detailed Republican proposal for moving toward a territorial system is in the form of a draft plan from Camp, and that proposal called for a 95 percent exemption on overseas earnings and only for domestic companies.

Analysts noted that is not the proposal that Clausing reviewed and said her study does not say that no jobs would be created in the United States.

800,000-Job Number Called ‘Flawed'

William McBride, an economist at the right-leaning Tax Foundation, called Clausing's study “flawed.”

McBride cited the study's assumption that the U.S. current effective tax rate for domestic investment would remain at 27.1 percent, even though Romney has proposed cutting the top corporate income tax rate from 35 percent to 25 percent. A lower effective tax rate would likely result in a smaller number of jobs created outside the United States, Clausing said in the study.

“Biden and Obama would have the U.S. stick with our current worldwide system that tries to tax the foreign earnings of U.S. corporations after they've been taxed abroad… It's hugely inefficient, raises almost no revenue, and is steadily being rejected by virtually every country on earth,” McBride said.

Proponents of the move to a territorial system see big benefits in its relative simplicity and the flexibility that U.S. multinational companies would gain in being able to more readily move foreign earnings into the United States without facing a big tax hit.

The idea of adopting some version of a territorial system has been recommended by the co-chairs of President Obama's National Commission on Fiscal Responsibility and the chairman of the president's Reform Export Council, Boeing Chief Executive Officer Jim McNerney.

Skeptics See Ending Deferral as Better

But Jane Gravelle, an economist at the Congressional Research Service, remains skeptical about the benefits of a territorial tax regime.

Instead, Gravelle recommended making simplifying changes to the existing worldwide system through a combination of ending the practice of deferring taxes on foreign income and adding a per-country foreign tax credit limit.

The complete text of this article can be found in the BNA Daily Tax Report, September 10, 2012. For comprehensive coverage of taxation, pension, budget, and accounting issues, sign up for a free trial or subscribe to the BNA Daily Tax Report today. Learn more »

© 2012, The Bureau of National Affairs, Inc.