FairTax Overview
The FairTax Would Give the U.S. the Most Internally Sound and Competitive Tax System
Effect on Direct Investment, Locational Decisions, and Repatriation.— Consider what would happen
to the current international tax problems posed above if the FairTax were adopted beginning with the
consequences of the U.S. being the world’s largest national market with a zero marginal rate of tax on
productive activity, investment and capital returns. Such a change would have profound relevance for
both foreign direct investment and domestic locational choices.
The U.S. would become the most attractive jurisdiction in the world from which to export, attracting
both foreign direct investment and domestic investment to base operations here. This, of course,
satisfies the fundamental policy goal of those who are considering a territorial taxing regime for the
U.S., as many countries have adopted: that goal is to ensure that a choice between headquartering a
company in the U.S. or overseas would not be influenced through the application of high U.S. marginal
tax rates to global income with no connection to the U.S. save the fact that the location of the
headquarters of the company. The FairTax provides the equivalent of a territorial taxing regime because
it does not tax foreign sourced income at all, and therefore cedes taxing jurisdiction to the country of
income source.
But it improves upon this choice dramatically. The FairTax would not also encourage investment
overseas as the territorial tax movement, by its own rationale, admits would occur. In fact, a zero rate of
U.S. tax would give foreign jurisdictions two choices: Reduce their tax rate on savings and investment
(which will stimulate global economic reform and growth) or lose investment to America. Companies
now American in name only would repatriate investment and jobs back to our shores.
Adoption of the FairTax would also end the problem posed by deferral – which imposes a penalty for
repatriating income earned overseas. Companies here now in name only would repatriate investment
and jobs back to our shores without penalty, since the earnings of subsidiaries would not be taxed to the
parent at all and the taxes paid to foreign nations would not be limited by the complex foreign tax credit
rules. And since the U.S. would not tax foreign returns to capital (as it would not tax U.S. returns) the
U.S. market for investment in stocks, in business, in real estate and otherwise would effectively become
the world’s largest tax haven for investment capital.
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