Press Release: Manufacturers and Scholars Urge Congress to End Corporate Tax Discrimination Against US Companies

November 29, 2017

A Smarter Territorial Corporate Income Tax Bridges the Left/Right Divide


Washington ~ The Coalition for a Prosperous America (CPA) joined today with several prominent progressive scholars, sent a letter (below and linked here) to Congress urging adoption of a smart, territorial corporate income tax called sales factor apportionment (SFA). While territorial taxes are typically associated with political conservatives, the letter reveals a significant opportunity for cutting edge corporate tax reform which can appeal to both the left and the right.

The letter was signed by Daniel Alpert (The Century Foundation and Westwood Capital), Marshall Steinbaum (Roosevelt Institute), Brad DeLong (University of California, Berkeley), Dean Baker (Center for Economic and Policy Research), Robert Hockett (Cornell School of Law), Gabriel Zucman (University of California, Berkeley), and Michael Stumo (Coalition for a Prosperous America). It stated:

"Sales factor apportionment (SFA) is, in our view, the best way to tax all firms - domestic, multinational and foreign - fairly in an integrated world economy."

Michael Stumo, CEO of CPA: "Our CPA business members - both Republicans and Democrats - make and grow things in the United States but face systematic tax discrimination under current law and under the bill currently under consideration in Congress. CPA members pay far higher effective taxes in comparison to their multinational and foreign company competitors."

Brian O’Shaughnessy, Vice Chairman of CPA: “My company, Revere Copper Products, has over 300 employees who live and work near Rome, New York. Revere is dedicated to the success of our community and our country. Sales factor apportionment would help end the tax discrimination against domestic companies like Revere Copper. It would also assist our export potential because profits from international sales would be tax free.” 

Dan Alpert, Founder of Westwood Capital and a Fellow at The Century Foundation: "America's current 'worldwide' tax system operates contrary to the national interest because it does not treat all firms who earn profits from sales in the US similarly. Instead, the tax code provides an unearned advantage to domestic multinationals and foreign corporations that offshore production, shift profits to Bermuda or invert to Ireland to pay far lower taxes." 

The letter described SFA in this way: 

"The US tax based for corporations would be calculated on the basis of a fraction of companies' worldwide income. This fraction would be the share of each company's worldwide sales that are destined for customers in the United States."

In practice, if American Widgets, Inc. sells 80% of its widgets in the US and exported 20%, then it pays tax on 80% of its total profit. If Multinational Widgets, Inc. sells 50% in the US, it pays tax on 50% of its total profit. If Foreign Widgets, Inc. sells 30% in the US, it pays tax on 30% of its total profit. Hiding profits in subsidiaries located in tax havens would become futile. A recent CPA study recently published in Tax Notes found that corporate tax revenue from SFA would increase by 34% or allows a 9% rate cut with no tax revenue loss.

Robert Hockett, law professor at Cornell Law School: "The fairest corporate tax system in a global economy should tax companies based upon their access to US-based consumers or end-users. It makes little sense to differentiate based upon where a company is legally incorporated, where it purports to produce, or which of its offshore subsidiaries are best at 'creative accounting' when reporting expenses." 

Gabriel Zucman, Assistant Professor of Economics at the University of California at Berkeley: "High tax US and European jurisdictions expend enormous resources fighting each other for tax revenue rather than pursuing tax haven jurisdictions. Rather than fighting about whether a multinational firm's highly paid accountants stayed within the law in allocating profits to a country, the US should lead the world in adopting SFA so all companies’s profits are simply taxed based upon where they sell to end users.” 

Dean Baker, Co-Founder of the Center for Economic and Policy Research: "SFA is both a fair and simple way to apportion tax burdens across country. It both minimizes the cost of compliance and the opportunities for avoidance."

Marshall Steinbaum, Research Director at the Roosevelt Institute: "As global corporate profits reach record highs but corporate investment has remained anomalously low since the financial crisis, it's clear that perverse international corporate tax policy is wreaking havoc on the global economy. If we move to a destination-based global corporate profits tax system like SFA, corporations will face a strong incentive to reinvest their profits rather than stash them in tax havens."

----- Full Text of Letter -----

November 29, 2017

Re: Support for sales factor apportionment for international corporate taxation

Dear Chairmen Hatch and Brady and Ranking Members Wyden and Neal:

We are writing to urge you to adopt a sales-based formulary apportionment (also called sales factor apportionment) regime for international corporate taxation as you proceed with your tax reform efforts. Solidifying the tax base should receive as much attention as setting the corporate tax rate. This is a once in a generation opportunity to improve the tax code. It should not be wasted.

Sales factor apportionment (SFA) is, in our view, the best way to tax all firms - domestic, multinational and foreign - fairly in an integrated world economy.

The current tax system has incentivized corporate inversions, profit shifting, recognition deferral and other notorious ills. It relies upon separate accounting of profits on a location by location basis so that multinational corporations (MNCs) strategically allocate earnings and costs in each location in which they operate. Though our current system purports to tax MNCs worldwide income, profit-shifting allows them to evade taxation on the basis of where their net income “lands” rather than where their gross income originates. The result is tremendous incentives to “earn” - i.e. to declare - income in low-tax countries. It is a classic race to the bottom causing the US corporate income tax base to erode at an alarming rate.

Tax competition between countries is highly incentivized by the current regime. While the effective US corporate income tax rate is estimated at 27%, it is mostly avoided by MNCs which are thus systematically advantaged relative to domestic US producers. Tax haven jurisdictions, where a large proportion of corporate earnings are reported, have very low effective rates between zero and five percent. Those countries include the Netherlands (2.3%), Ireland (2.4%), Bermuda (0.0%), Luxembourg (1.1%), Singapore (4.2%), UK Islands Caribbean (3.0% and Switzerland (4.4). Lowering the US corporate tax rate to 20% does not materially change the incentive to allocate profits to these “Cayman-style” jurisdictions.

Congress cannot confidently set a tax rate until it solidifies the tax base.

Profit-shifting continues to rise dramatically. In 2001, estimated profit-shifting by US MNCs to tax haven jurisdictions reduced corporate tax haven jurisdictions reduced corporate tax revenue by less than $15 billion. In 2012, that number rose to nearly $120 billion. In 2016, the number is at least $134 billion. These estimates do not include revenue loss from corporate inversions or profit shifting by foreign MNCs.

Domicile (country of incorporation) should not matter, but it does under the current tax system, creating troubling taxation distinctions. US domiciled MNCs use deferral to delay paying US taxes on overseas profits so long as they keep those profits offshore. Less sophisticated US companies pay taxes on all their profits. Foreign domiciled corporations doing business in the US pay taxes on a territorial basis. In other words, they pay taxes on profits actually recognized here. This territorial, versus worldwide, tax differences incentivizes corporate inversions - the practice of relocating a corporation’s legal domicile to a lower-tax jurisdiction, usually while retaining its material operations in the US and continuing to sell to US customers.

Ending deferral has been suggested as a solution. It would level the playing field between US domiciled companies that are primarily domestic versus MNCs. But it does not resolve the problem of inversions or profit shifting by foreign MNCs. The House bill includes a minimum tax of 10% on overseas profits. But the 10% domestic versus foreign earned profits differential maintains strong incentives to allocate profits offshore.

Redefining the source of income is, in our view, the key to correcting the current dysfunction. This is what the sales factor apportionment system, already in use by most US states, does. Corporations earn income from sales. Therefore income should be allocated based upon the destination of those sales. MNC income should no longer be allocated based upon the location of a a subsidiary that allegedly earned it. The location of sales is much more difficult to manipulate than the “origin of income” under the current system.

The US tax base for corporations would be calculated on the basis of a fraction of companies’ worldwide income. This fraction would be the share of each company’s worldwide sales that are destined for customers in the United States. The taxpayer, under SFA, is the whole unitary business, including all evasion-motivated subsidiaries over which the parent corporations exercise legal and economic control.

The SFA system we support is similar to the method used by many US states to allocate national income. These states adopted SFA to solve the difficulty of assigning profits, for state corporate income tax purposes, from national or international corporations to individual states. They faced an additional problem in that taxing based upon property or employees located in the state created incentives to move production out of that state. Using a sales-based taxation method solved this problem because locations of sales if far less responsive to tax differentials. Customers are far less mobile than the firm’s assets or employees.

What we are advocating is a change of the US corporate tax base that replicates the changes the states have made in relation to the nation. In effect, firms should be taxed on their access to a specific consumer market - from which they generate revenue - rather than on their cleverness at artificially allocating expenses and revenue in tax havens in which their subsidiaries “incorporate”.

By focusing upon sales as the measure of taxable economic activity, the SFA system does not rely upon or incentivize artificial legal distinctions among types of firms. Subsidiaries, branches and hybrid entities are all considered a unitary business for tax purposes - which, after all, is what they are. Whether a parent or a subsidiary is incorporated in the US or elsewhere makes no practical difference to production, sales or distribution. Hence it should make no difference to taxation.

An SFA system would improve America’s trade competitiveness because it provides domestic producers a further incentive to export. Profits from sales oversees would not be subject to taxation. Foreign producers who sell goods and services here would pay taxes on profits arising from the privilege of accessing our market. No corporate tax benefit would arise from moving a US plant oversees.

A recent study by the Coalition for a Prosperous America (CPA) found that SFA would deliver 34% more tax revenue from US corporations in 2016 at the current tax rate. CPA further estimated that a switch to SFA at a 20% rate would add an estimated $1.04 trillion uplift to tax revenue over the next 10 years. While these numbers would have to be verified by the Joint Committee on Taxation, there is no doubt that tax revenue can be substantially improved with a solidified tax base.

SFA has features that can bridge the partisan divide to establish meaningful corporate tax reform. It achieves the Republican goal of a territorial tax on corporate income and the Democratic goals of raising revenue. SFA will eliminate tax competition because the corporate tax rates in other countries become largely irrelevant. It will treat all types of firms the same.

It is for these reasons that we ask you to establish sales factor apportionment as the basis for corporate income tax reform.


Daniel Alpert (Founder, Westwood Capital LLC and Fellow, The Century Foundation)
Brad DeLong (Professor of Economics, University of California, Berkeley)
Dean Baker (Co-Director, Center for Economic and Policy Research)
Gabriel Zucman (Assistant Professor of Economics, University of California, Berkeley)
Robert Hockett (Edward Cornell Professor of Law, Cornell School of Law)
Michael Stumo (Chief Executive Officer, Coalition for a Prosperous America)
Marshall Steinbaum (Research Director and Fellow, Roosevelt Institute)


About CPA: The Coalition for a Prosperous America is the nation’s premier organization working on the intersection of trade, jobs, tax and economic growth. We represent the interests of 4.1 million households through our agricultural, manufacturing and labor members.


Contact Media Director
Paola Masman: paola@prosperousamerica.org

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  • Chuck Lynd
    In Ohio I would love to see our R & D Senators (Rob Portman and Sherrod Brown, respectively) bridge their ideological gap on this important issue. @senrobportman @sensherrodbrown
  • Chuck Lynd