to be less willing to equalize taxes than, for example, to equalize import tariff rates under a free trade or other agreement. A proposal that would favor keeping investment and production in the United States would be to retain the system of worldwide taxation for U.S. companies but to impose higher taxes on investments or income derived from abroad. One proposal to accomplish this would be to permit only a deduction from income, and not a credit to be deducted from the total tax bill, for taxes paid abroad. Other proposals are to end provisions that allow companies to defer foreign-source income indefinitely, to restrict deductions for costs associated with deferred income, or to neutralize the tax benefits for companies moving their “headquarters” to a tax haven (such as Bermuda or the Cayman Islands). Another proposal, however, that would respond to the globalization of businesses is to exempt U.S. companies from paying taxes on their overseas income from investments. 27
Numerous other tax provisions affect U.S. businesses and their manufacturing decisions. The taxation of income by Americans working abroad, the rate of taxation of corporations, various tax incentives or rebates aimed at promoting specific desired activities (such as technological change), the taxation of corporate dividends, and other tax-related issues are being debated widely. These are beyond the purview of this report.
As with other policies and their impact on global supply networks, the issue is twofold. Is the predominant effect of a change in policy one of diversion or creation? Does a change divert production from the U.S. economy to a foreign location, or does it draw production toward a U.S.-based location? Does the change create more production overall, or does it discourage economic activity?
Global supply trains could not exist without international trade. Traditionally, trade and investment policy deals with border barriers. These include customs duties, import quotas, the freedom to move capital across borders, and the right to establish businesses (including taking over an existing company) in a given country. The development of globalized supply networks does not alter the role of traditional trade and investment policies.
Tariffs or customs duties are national taxes imposed on imports (and sometimes exports) and were originally used primarily to raise revenues for governments, particularly those with weak systems for collecting taxes. Currently for most industrialized countries, the main purposes of tariffs and quotas are to provide protection for domestic industries, to offset some of the cost advantage of foreign suppliers, and also to generate income for governments.
For the major countries of the world, average tariff rates are now quite low (2.9% for the 10 advanced industrialized nations) but higher at 9.8% for the 142 developing nations of the world.28
27 For details, see CRS Report RL34115, Reform of U.S. International Taxation: Alternatives, by Jane G. Gravelle. CRS Report RL31444, Firms That Incorporate Abroad for Tax Purposes: Corporate "Inversions" and "Expatriation", by Donald J. Marples. U.S. Government Accountability Office, International Taxation, Large U.S. Corporations and Federal Contractors with Subsidiaries in Jurisdictions Listed as Tax Havens or Financial Privacy Jurisdictions, GAO- 09-157, December 18, 2008.
28 Ng, Francis K. T., “Trends in average applied tariff rates in developing and industrial countries, 1981-2007,” World (continued...)