FairTax Overview
distributed to U.S. shareholders, according to one recent study. 9 And that same study stated that
spending could increase gross domestic product by $178 billion to $336 billion and will add 1.3 million
to 2.5 million jobs if we were to offer a temporary reprieve from the repatriation tax, as well as boost
U.S. tax revenues. About half of OECD nations do not have this problem because they have “territorial”
tax systems.
Our extraterritorial income tax system affects U.S. entities and corporations in more ways than by
frustrating their effort to repatriate earnings like their competitors based in lower taxed jurisdictions can
do. That is, in a manner of speaking, just a symptom. The greater infirmity is that rate of the tax we
impose makes the U.S. one of the least favorable locations to base international operations.
Again an understanding of the U.S. international tax system is critical. Broadly stated, nonresident alien
individuals, unincorporated entities even corporations are taxed like U.S. taxpayers on most U.S.
Business income. An individual is taxed when it is engaged in a trade or business on income effectively
connected to that trade or business (IRC section 871(b). A foreign corporation is likely taxed under IRS
section 11 on its taxable income effectively connected with the conduct of a U.S. trade or business (IRC
section 882). But nonresident individuals are also subject to U.S. taxation on some types of recurring
investment income. And a corporation who is conducting a trade or business may be also subject to the
Branch Profits Tax. 10
Paradoxically, despite having the highest national statutory rate, the U.S. raises less revenue from its
corporate tax than do the other members of the OECD on average. In fact, federal corporate income
taxes raise little revenue compared with other federal taxes; roughly comprising 11.6% of total federal
tax revenues. At $191 billion, they were equal to 1.3 percent of the nation’s gross domestic product.
The combination of high rates, worldwide taxation and a competitive global marketplace makes our
corporate tax system extremely punishing. But it is the marginal tax rate -- the rate on the last dollar of
income earned (which is very different from the average tax rate, which is the total tax paid as a
percentage of total income earned) – that matters the most. The rate at which we tax decisions at the
margin matters in at least two regards: (1) it discourages foreign corporations from locating their
corporate offices or subsidiaries in the U.S. and in locating plants, facilities here for production purposes
(i.e., it influences the location where capital is deployed), and (2) it encourages outsourcing of plants,
facilities and production facilities of domestic multinationals to jurisdictions where the taxes imposed
are less.11
9
“The Benefits for the U.S. Economy of a Temporary Tax Reduction on the Repatriation of Foreign Subsidiary Earnings,”
by Laura D’Andrea Tyson, Ph.D.; Kenneth Serwin, Ph.D.; Eric Drabkin, Ph.D. (October 13, 2011).
10
The branch profits tax is an extra income tax imposed by the U.S. on foreign corporations that earn profit from their U.S.
investments or U.S. business operations.
11
Salvador Barrios (European Commission), Harry Huizinga* (Tilburg University and CEPR)
Luc Laeven (International Monetary Fund and CEPR) and Gaëtan Nicodème (European Commission, CEB, CESifo and
ECARES), International Taxation and Multinational Firm Location Decisions (April 2009). See also Claudio A. Agostini,
"The Impact of State Corporate Taxes on FDI Location," Public Finance Review 2007; 35; 335.
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