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1 Philip Dittmer, A Global Perspective on Territorial Taxation 1 (2012)

handle is hein.taxfoundation/srcacxz0001 and id is 1 raw text is: FOUNDATION
August 10, 2012
No. 202
A Global Perspective on Territorial Taxation
by Philip Dittmer
Introduction
Catherine the Great is supposed to have said, A great wind is blowing, and that gives you either imagination
or a headache. In Washington, winds are stirring for corporate tax reform. But while there is broad
bipartisan agreement that tax rates should be reduced,' there is less consensus regarding what the tax rate
should be, how to pay for a tax cut, or generally how to treat international business income. These
considerations are inextricably intertwined because the U.S. assesses its corporations on worldwide income.
Beyond imposing the highest top marginal tax rate in the developed world,2 the U.S. tax system's treatment of
international business income is exceptionally burdensome. It inflicts tremendous compliance costs, creates
enormous distortions of economic activity, deters companies from headquartering in the U.S., awards tax
preferences to politically connected industries, and traps huge amounts of U.S. corporate profits overseas. To
add insult to injury, despite these punitive features, the system captures a meager stream of tax revenue.
To address these structural flaws, recent years have witnessed a steady march of tax reform proposals from
both sides of the aisle and from several independent advisory boards and agencies. Though reform plans vary
widely in their specific provisions, they follow one of two general approaches to taxing international business
income: worldwide basis versus territorial basis.
Under the worldwide approach, all income of domestically-headquartered companies is subject to tax,
including income earned abroad. To avoid double taxation of the same income base, worldwide systems
provide credits for taxes paid to foreign governments. The overarching purpose of the worldwide design is to
ccreate equality among resident taxpayers, so as not to distort the investment decisions of domestically
headquartered companies toward low-tax countries.3
1 President Obama's tax proposal would lower the top marginal tax rate from 35 to 28 percent to help encourage greater
investment in the United States, and reduce the tax-related economic distortions. See The White House & Department
of the Treasury, The President's Framework for Business Tax Reform, (Feb. 2012), at 9, http ./wwtreasur .go /resource-
center/tax-oi yDocuments/The-P residents-Framework-for-BusnessTax-Reform-02-22-20 12.pdf.
2 Scott A. Hodge, The Countdown is Over. We're #1, TAX FOUNDATION TAX POLICY BLOG, Apr. 1, 2012,
http:/ta ounldation org/article/countdown-over-were- 1.
SWilliam B. Barker, International Tax Reform Should Begin at Home: Replace the Corporate Income Tax with a Territorial
Expenditure Tax, 30 NORTHWESTERN JOURNAL OF INTERNATIONAL LAW & BUSINESS 680 (2010).

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