The Tax Foundation has published The Importance of Tax Deferral and a Lower Corporate Tax Rate:

President Obama’s recently released budget reemphasizes the administration’s goal to curtail tax deferral for income earned abroad by American businesses, but a new Tax Foundation study argues that this would harm U.S. competitiveness in low-tax countries. …

“Eliminating deferral under our current worldwide system of taxation would immediately subject all foreign earnings of American multinational companies to the high federal corporate tax rate and reduce competitiveness abroad,” [Robert] Carroll said. “On the other hand, a territorial tax system – one that would exempt foreign income from U.S. tax – would have distortionary effects on business decisions such as locating income and expenses. In both cases, a lower federal corporate tax rate would help offset the negative consequences.”

 

Currently, the U.S. system for taxing foreign earnings blends aspects of both a worldwide and territorial system. U.S. multinational corporations are taxed on their worldwide income, but active earnings are not taxed until repatriated to the U.S., minus credits claimed for foreign taxes paid. Reforming the corporate tax system requires balancing neutrality between foreign and domestic production with international competitiveness, Caroll notes.

 

“We do not want our tax law to favor foreign production over domestic production, and at the same time we do not want to put U.S. companies with foreign operations at a disadvantage when they compete abroad with foreign companies,” he writes.

 

According to the report, the United States is the only large economy that taxes corporate income worldwide with a tax rate exceeding 30%. During 2009, both Great Britain and Japan enacted territorial systems, giving their multinational companies a major tax advantage over U.S.-based firms that are saddled with a worldwide system. Over 80% of developed nations now have territorial systems.

 

Lowering the corporate tax rate to the average that prevails among our major trading partners, for a combined federal-state rate of roughly 25% (implying a federal corporate tax rate of 20%), would be a reasonable upper-bound.