September 6, 2001 | News Releases on Taxes
WASHINGTON, Sep. 6, 2001-A bill designed to penalize non-U.S. insurance companies would set a dangerous precedent, align U.S. tax policy with that of many of the world's most economically stagnant countries, and make our own economy less competitive, says a new paper from The Heritage Foundation.
The bill, introduced by Reps. Nancy Johnson, R-Conn., and Richard Neal, D-Mass., attempts to help the insurance companies headquartered in their states by imposing a discriminatory tax on U.S. subsidiaries of insurance companies based in low-tax countries. It would exempt from this extra taxation companies based in jurisdictions with an effective income tax rate of at least 7 percent.
"Congress shouldn't be endorsing protectionism that would force Americans to pay higher insurance rates," says Daniel Mitchell, Heritage's McKenna senior fellow in political economy. "Lawmakers instead should be reforming our tax policy to help American firms compete better abroad."
Mitchell says the United States should adopt a territorial tax system, in which it taxes only income earned inside its borders, rather than the current practice of taxing all income earned by U.S.-based multinational corporations. It also should lower corporate income tax rates, stop taxing dividend income-which already has been taxed once-and repeal the alternative minimum tax, he says.
The United States collects a 35 percent tax on profits U.S.-based companies make overseas, although it does give credit for tax paid to other nations. This makes it difficult to compete overseas with foreign companies operating in low-tax nations. Bermuda has no corporate income tax, for instance, and Ireland's corporate rate is 12.5 percent. This gives companies based in nations with territorial tax systems a tremendous competitive advantage over U.S. multinationals, Mitchell says.
High-tax jurisdictions, including most European Union members, have sought to "harmonize" tax rates and share income information to nullify the competitive advantage enjoyed by companies based in low-tax states, he says.
"They realize that low tax rates have helped countries such as Ireland and Bermuda to raise capital, create jobs, attract entrepreneurial talent and spur economic growth," Mitchell says. "But rather than join the low-tax club and reap these benefits themselves, they want to penalize those countries, along with the ratepayers and others who bear the costs of higher taxes."
Tax competition, he says, should be celebrated, even in those rare cases in which the United States has a less attractive tax system. "If members of Congress fear that U.S. tax law is making it harder for American companies to compete, they should change the law, not broaden its reach," he says. "Territorial taxation would be a good place to start."