While promoting his ideas for overhauling our tax code today in North Dakota, President Trump said that Congress should adopt a territorial tax system which, he argued, would result in more investment in the United States. You’re not alone if you’re not sure what “territorial” means in this context. It’s a euphemism used by some politicians to describe a proposal that will be wildly unpopular once voters understand what it really means.
A territorial tax system is one that exempts the offshore profits of American corporations from U.S. taxes. A new ITEP report explains this in greater detail. Adopting a territorial tax system would dramatically worsen the already significant problem of corporate tax avoidance.
The federal tax system already provides enormous tax breaks for offshore profits. The biggest is the rule allowing American corporations to defer paying U.S. taxes on most offshore profits until they officially bring those profits to the United States, which in some cases does not happen for years, if ever. A territorial system would provide an even greater break because corporations would never owe U.S. taxes on these profits.
Corporations are already highly skilled at making U.S.-earned profits appear to be earned offshore to avoid taxes. A territorial tax system would increase the rewards for doing so because it would provide an a tax exemption, rather than just a tax deferral, for profits characterized as foreign profits.
The latest data available reveal that American corporations reported to the IRS that their subsidiaries in Bermuda earned $104.3 billion in profits in 2012. This is impossible because the entire economic output of Bermuda that year was only $5.5 billion.
Clearly our corporations are engaging in offshore tax avoidance on a massive scale. A territorial tax system would only increase the rewards corporations already receive when they engage in these schemes.
