Biden rips Territorial Tax System to Wisconsin supporters, and for good reason.

ABC reporter Jake Tapper blew any credibility he had when he took this shot at Joe Biden’s recent criticism of a “territorial tax,” where companies would pay the hosting countries taxes but not have to pay the U.S. tax. In a moment of uncharacteristic wonkiness, Biden dropped this on supporters:

Tapper seems to think Biden should fall in line with other corporate administration officials who support it, even though it’s a lousy idea:

ABC: VP Biden railed against Romney backing a territorial tax system: But a number of advisers to the president support the idea as well – including members of the President’s Export Council, the commission the president set up to recommend ways to reduce the deficit, and members of his Council on Jobs and Competitiveness.

In a letter … Boeing CEO Jim McNerney … called for a “competitive territorial tax system for the United States,” one that “should broadly follow the practice of our trading partners and should not be designed to raise new revenue, or to destabilize the U.S. corporate tax base, but rather to make the US tax system more competitive with its major trading partners. The rest of the world increasingly uses territorial systems under which foreign earnings – taxed once in the foreign country – can be brought back for reinvestment in the domestic economy without incurring additional home country tax.” McNerney noting that of the 34 countries in the Organization for Economic Co-operation and Development, 25 use territorial systems, with the United Kingdom and Japan having adopted them in 2009.

It’s a horrible idea that failed once already, as mentioned below. Funny thing, Tapper may not be aware that many of those twenty-five countries are backing away from territorial taxes:

Foreign Policy: One sign that the territorial system is not the answer is the fact that the European Union is considering proposals to move away from the system.(European Commission, Common Consolidated Corporate Tax Base).

Nice try Jake, but research is just so much touble. Even though Biden’s explanation was simplified enough so even I could understand, here’s a more detailed reason why it’s all wrong for job creation and as U.S. policy:

The President's Export Council … calling for U.S. taxes to apply only to earnings in the United States with foreign profits taxed only in the territories where they were earned. The president and Congress  should recall the New York Times quote of a high ranking Apple executive to the effect that the company doesn't "have an obligation to solve America’s problems" … For a long time it was argued that without the necessity to pay U.S. taxes upon repatriation of foreign earnings, U.S. global corporations would rush to move capital back to the U.S. where they would invest and become a job creation machine.  But in 2004, when Washington instituted a one year tax amnesty the results were disappointing … the Congressional Research Service calculated that the top ten repatriating U.S. corporations actually reduced employment by 447,000 after repatriating about $99 billion … A territorial tax system would only be a boon for the already thriving tax avoidance industry … encourage further investment in tax havens and complex intra -company transfer pricing schemes to move as much income as possible out of normally taxed countries into the well-known low or zero tax havens.

The answer is two-fold. First, the U.S. corporate tax needs to be reduced to 15-20 percent but with a base broadened by elimination of a variety of deductions. Second, the U.S. tax deferral for un-repatriated foreign earnings should be abolished.