Territorial Tax System
One Sentence Argument
The new Republican tax code taxes profits American companies earn here in America twice as much as profits they earn overseas and gives tax breaks to companies with manufacturing facilities in other countries, giving companies a massive incentive to move American jobs overseas.
The GOP tax bill didn’t just cut the tax rate for what corporations earn here in the US, it also completely overhauled the way we tax corporate profits overseas. We now have a modified territorial tax system, which means that foreign profits are taxed significantly less than US profits, giving companies an incentive to move money and jobs overseas.
How Things Used To Work
The way the United States corporate income taxes have always worked (at least until recently) was that corporations paid the standard American corporate tax on all their profits no matter where they earned that money. They got to subtract the amount of taxes they paid to other countries from that total, but overall, they were supposed to pay the same rate at the end of the day on foreign profits and profits earned in the United States. The point, prior to this year, was that companies would not have an incentive to move jobs overseas.
How Things Work Now
Now, corporations actually pay lower tax rates (about half) on income earned overseas, essentially an automatic 50% tax cut on everything they earn abroad. So if you have a factory in the US and a factory in India, and both make the exact same amount of profits, you’re going to pay substantially less in taxes on the money made through India.
It gets worse though. Because companies can still subtract from their US tax bill the taxes they pay to other countries (and because the new tax rate on foreign profits is just 10.5%), many corporations won’t pay a cent in US taxes on the money they’re earning abroad. Most countries have corporate tax rates above that threshold, meaning there’s nothing left for the US to legally tax.
But wait, it gets even worse!
Not only does the new tax system encourage corporations to move their money and their corporate headquarters overseas through this lower tax rate on foreign earnings, it actually has a specific provision that gives even more tax breaks to companies with plants and manufacturing facilities in other countries.
Under the new law, the more factories a company has overseas, the less they pay in taxes! If that isn’t a strong incentive to shut down American factories and move them overseas, then I don’t know what it.
(As you might expect, the benefits of these changes aren’t just limited to rich Americans. Foreign millionaires with investments in American companies stand to earn quite a bit as well. And by quite a bit, we mean at the end of the day they’re going to get nearly twice as much of a tax cut as the true American middle class, the middle 20% of Americans, combined. Studies have shown that out of all the financial benefits of the Republican tax bill, foreign investors will benefit twice as much as middle-class Americans.)
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- Fact Sheet: The Consequences of Adopting a Territorial Tax System