Many of my friends and critics have reacted to my criticism of the territorial system of taxation for global corporations (taxes are paid only in the country where the profits are earned) by emphasizing that the United States is the only major country that taxes its corporations on a worldwide basis. Washington, they say, should conform to the majority international practice.
Well, I was in Seoul last week. U.S. Chamber of Commerce President Tom Donahue was also there to praise the recent ratification of the U.S.-Korea Free Trade agreement and especially its clauses on protection of intellectual property which has long been a problem in South Korea. Just before he and I arrived in South Korea, the Koreans failed to ratify an agreement on sharing of intelligence that had been negotiated between the South Korean and Japanese governments. While we were there. the new North Korean leader, Kim Jong Un, dismissed his top military adviser, thereby sending a shiver the length of the Korean peninsula and across the Sea of Japan to Tokyo.
To whom does Tom Donahue and his members at the Chamber turn when they need their patents and trademarks protected? They have found the South Korean courts to be uncertain at best. They don't go to Geneva to discuss the problem with the World Trade Organization (WTO). No, no. They run to Washington. To whom do they turn when they want a trade deal that will open SouthKorea to U.S. investment and exports? Again, they turn to Washington. Most importantly, what is it that keeps the South Koreans and Japanese from each others' throats and that provides the stability and security without which the South Korean economy would be one of the worlds' poorest as it was in 1953? It is, of course, the U.S. security blanket over East and Southeast Asia. Without that there would be no corporate earnings in the region for anyone to tax.
My point is that Washington is essential to the overseas earnings capability of U.S. global corporations and therefore has not only a right, but an obligation to tax those earnings and to tax them without phony deferrals. However, the tax should be at a competitive rate. My proposal is a U.S. corporate tax rate of 15 percent. Maybe 20 percent is politically more feasible. But the current rate of 35 percent makes the United States completely uncompetitive in the investment sweep stakes.
To make the United States really globally competitive a value added tax (VAT) should be adopted along with the reduced corporate tax rate. VATs are rebated on exports and, of course, added to imports. In addition, Washington should adopt the special investment programs of countries like China, Singapore, France, and Ireland that provide targeted tax benefits, infrastructure improvements, and reduced utility costs. With this kind of a package, America would be the world's greatest magnet for direct and other investment.
Clyde Prestowitz is the president of the Economic Strategy Institute and writes on the global economy for FP.