Readings: Territorial Regimes

Industry lobbiests have been promoting a territorial regime for the United States and other coutries. Most disinterested commentators favor a worldwide system, for fairness, simplicity, and minimizing tax avoidance opportunities.


Edward D. Kleinbard, "Throw Territorial Taxation From the Train," Tax Notes, February 5, 2007, pp. 547-564.

Abstract: This report reviews the case for replacing the Internal Revenue Code's complex rules for taxing foreign direct investment with a territorial tax system. The report argues that a territorial tax system would vastly exacerbate crossborder transfer pricing problems by rewarding successful transfer pricing gamers as "instant winners" of the tax lottery. In light of the overwhelming evidence of pervasive transfer pricing problems today, Kleinbard argues that this alone is sufficient reason not to move to a territorial tax system. Kleinbard believes a "full-inclusion" tax system would eliminate the tax frictions on repatriating foreign earnings, and would genuinely be simpler than current law or than a territorial tax system and would significantly reduce transfer-pricing issues.

James R. Repetti, "Will U.S. Investment Go Abroad in a Territorial Tax: A Critique of the President's Advisory Panel on Tax Reform," 8 Florida Tax Review — (2006) (forthcoming), Available at SSRN: (January 23, 2007).  

Abstract: This article critiques the Report of the President's Advisory Panel on Federal Tax Reform. The Report recommends the U.S. adopt a territorial tax system that would exclude income earned by U.S. taxpayers actively conducting foreign businesses. The Report incorrectly uses the absence of evidence of an adverse effect to assert that there will be no adverse effect. The Report justifies its recommendation for a territorial tax by asserting that the tax will eliminate the tax impediment to repatriating earnings and will make U.S. multinationals more competitive. This article explains that the Report does not consider potential costs of a territorial tax that make it impossible to determine the net welfare impact of a territorial tax. As a result, this article concludes that the Report fails to make a persuasive case for such a tax.