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When countries across the globe entered into a period of economic recovery during 2010, it became increasingly clear that emerging nations were bouncing back far quicker than their more established Organization for Economic Cooperation and Development (OECD) counterparts. For example, while the global recession of 2008 and 2009 left more than 15 million American citizens unemployed and home-owners nationwide facing the burden of negative equity, nations such as China, Korea and India found that they were experiencing rapid growth as their respective gross domestic products (GDP) soared.

It was generally accepted that this was because these developing nations were less damaged by the original financial crisis, as they were not encumbered with significant debt before the events of 2008. Not only this, but countries such as China and India did not officially enter a period of recession, and instead suffered solely from diminished economic growth. However, nations that experienced a quicker than expected economic recovery also performed outstandingly well in the World Education Rankings released in 2010, which suggests a correlation between prospering economies and financial sectors with strong teaching systems.

SEE: How Education And Training Affect The Economy

Switzerland
Switzerland certainly followed this trend, and recorded a ranking of 14th in these world listings. In terms of mathematics, the country achieved the eighth highest score, and significantly outperformed nations such as the United States and the United Kingdom. The nation's performance is largely the result of a varied and flexible educational system, as both the federal government and a total of 26 regional cantons share responsibility for higher and tertiary learning. Not only this, but the Swiss Financial Institution and Swiss Banking School also provide advanced Ph.D. programs for students, with an emphasis on teaching wealth management and private banking.

This educational system is certainly not wasted in Switzerland, as banks and lending institutions play a significant role within the national economy. In 2009, the country's financial sector employed an estimated 195,000 people, which accounted for 5.8% of the entire Swiss workforce. Not only this, but Switzerland is also a world leader when it comes to offshore private banking and wealth management. Given that Swiss based banking organizations UBS and Credit Suisse are both major forces within the global financial market, they are also responsible for job creation on a worldwide scale.

Canada
Canada was another nation to outperform the U.S. in the World Education Rankings of 2010, with an overall placing of 10th and an unusually consistent performance across reading, mathematics and science. In fact, this level of consistency and reliability is also a significant feature of the Canadian economy, and this was most notable during the aftermath of the global recession. While the U.S. economy continued to spiral downwards during the formative months of 2010, the conservatively managed financial services sector within Canada remained stable while offering enormous security to its employees, businesses and citizens.

As a testament to this, the World Economic Forum ranked Canada's banking system as the most reliable for four years running. As prudent lending, in particular, has continued to consolidate a strong financial service sector and create opportunities for growth and overseas investment, 267,000 nationals are employed within the industry, and there has been a 21.5% rise in full time banking employment during the last 10 years.

SEE: The Evolution Of Banking

Ranking second among OECD registered countries, Finland's students continue to excel as standard bearers for educational excellence. Undoubtedly operating the single most innovative and unique educational system in the world, Finland has turned its back on the centralized and evaluation driven model adopted by the majority of western nations. Although Finland spends an estimated 30% less per student than authorities in the U.S., 66% of all students attend college and enter into higher education. In addition to this, 93% of Finnish students graduate from high school, and this is nearly 18% higher than the overall rate recorded in the U.S.

Given this and the fact that a further 43% of Finnish high school students go on to study at vocational schools, there is a huge opportunity for individuals to learn practical financial skills that can be applied to the fiscal sector. There is also ample opportunity for these skills to be utilized, as the financial management sector grew to a total worth of more than 1 billion euros in the decade between 2000 and 2011. As of 2009, Finnish companies within the national financial sector also employed a total of 14,554 staff across more than 5,000 offices, with finance and business services accounting for 14.5% of the country's total workforce.

SEE: The Correlation Between Education And The Economy

The Bottom Line
The link between countries with outstanding educational systems and strong financial service sectors is becoming increasingly prominent, and the speed with which nations such as Switzerland, Canada and Finland recovered from the effects of the global recession also showcased extraordinary robustness. In terms of defining why the educational systems employed by these nations have proved so consistently successful, it is interesting to note that each is extremely federated and flexible and far removed from the centralized model favored historically by developed nations.

In relation to how these systems have benefited each nation's financial service sector, the global educational rankings reveal that students in Switzerland, Canada and Finland have showcased an exceptional and consistent understanding of core mathematic principles. This outstanding level of numeracy forms the foundation of any financial sector job or service, and when coupled with evolved higher educational programs and diverse vocational courses it helps to develop a wide portfolio of skills to suit private banking and lending organizations. This is certainly something from which nations like the U.S. and the U.K. can learn from as they seek to establish long-term economic growth and stability.

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The Top 3 Educational Systems In The World

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When countries across the globe entered into a period of economic recovery during 2010, it became increasingly clear that emerging nations were bouncing back far quicker than their more established Organization for Economic Cooperation and Development (OECD) counterparts.

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INVESTIGATING THE LAG STRUCTURE OF THE EDUCATION-INCOME INEQUALITY RELATIONSHIP on JSTOR

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National income inequality is an important indicator of social stratification, the causes of which are little understood. Education is known to be related to in...

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http://www.businessinsider.com/wef-19-countries-with-the-highest-tax-rates-in-the-world-2015-10?r=UK&IR=T

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In a meeting at the AEI Bill Gates points to what economists will argue is the best possible tax system, the progressive consumption tax. It's worth pointing out the details of quite why economists think this is such a good tax:

I think tax structures will have to move away from taxing payroll. ... Technology in general will make capital more attractive than labor over time. Software substitution - whether it's for drivers or waiters, nurses ... it's progressing. And that's going to force us to rethink how these tax structures work in order to maximize employment given that capitalism in general over time will create more inequality, and technology over time will reduce demand for jobs, particularly at the lower end of the skill set. We have to adjust, and these things are coming fast. Twenty years from now, labor demand for lots of skill sets will be substantially lower, and I don't think people have that in their mental model. ... Economists would have said a progressive consumption tax is a better construct at any point in history. But what I am saying is that it's even more important as we go forward because ... I want to distort in the favor of labor. ...When people say we should raise the minimum wage - I know some economists disagree - but I worry about what that does to job creation. The idea that through the Earned Income Tax Credit you would end up with a certain minimum wage that you would receive, that I understand better than intentionally dampening demand in the part of the labor spectrum that I'm most worried about.

There's two parts to why such a progressive consumption tax is regarded so highly by economists. The first part speaks to efficiency, the second to equity.

To deal with the second idea first: despite many thinking that economists are simply the handmaidens of the oppressor class of the 1% "what's fair?" is a question that is asked rather a lot in the halls of academe. And the general answer is that fairness in a taxation system requires that those with the greatest capacity to pay should pay more tax than those with a lesser capacity to pay. This is accepted by pretty much everyone: that average tax rates should rise with income. Sure, some to many go on and insist that the rich should pay much more than this, face rising marginal rates perhaps, but the original contention is supported by pretty much everyone. And that's where the "progressive" part comes in. It doesn't mean that there has to be a number of different tax rates: that would be insisting that there must be higher marginal rates. All you need to have rising average tax rates is that there is a flat tax with some non-taxable allowance at the bottom of it.

Just as a constructed illustration of this, take a tax system with a 10% rate on all income over $10,000 a year, the first $10,000 being tax free. If you make $10,00, your tax rate is 0%. If you make $20,000 then your tax bill is $1,000 ($20k - $10k x 10%) or 5% and if $100,000 then your tax bill is $9,000 ($100k-$10k x 10%) or 9%. We have rising average tax rates even if we don't have a rising marginal one. Indeed, the average tax rate will asymptotically approach the flat tax rate itself as income rises. As above, you can also have rising marginal rates or tax bands if you desire, but this flat tax with an allowance is indeed enough to meet the condition of it being a progressive tax system.

The second part is about efficiency, which is that part that means that we tax consumption. Here the concern is about deadweight costs. All and any tax, by being levied, means that some economic activity doesn't happen. But we do need to raise some taxes, somewhere, for we do rather need this thing called government and we've got to pay for it. Maybe we don't need as much as we have, perhaps we need more, but the basic fact that there have to be taxes of some kind remains. We would obviously therefore prefer to raise the tax money we need by using the taxes that have the least deadweight costs. All other things being equal we'll be richer by doing it this way rather than using taxes which destroy more economic activity for the same amount of revenue collected.

We know which taxes destroy the least economic activity as well. Repeated taxes on real property can actually create more economic activity in certain circumstances. Then more costly are consumption taxes, more costly again are taxes upon incomes and then most costly are capital and corporate taxes. Transactions taxes like the financial transactions tax are so ludicrously expensive in this sense that we don't usually include them in our list: but they're way up at the top there, even more damaging than capital or corporate taxes.

So, we'd like to get as much of a our revenue needed from property taxes. Then we also quite like the idea of taxes to change peoples' behaviour. A carbon tax, smoking and booze taxes, road use taxes and so on. But these on their own aren't enough to fund what we all seem to want from modern government. So we need to move along that spectrum to the more expensive taxes, the ones with higher deadweight costs. And that's where our progressive consumptions tax comes in. We want to get rid of those more expensive ones, on capital, corporations and incomes and move to taxing consumption. One way to do this is simply a sales tax. But that also wouldn't be enough: it's very difficult to have a sales tax of more than around 10% without finding that you've got a huge tax avoidance problem as the grey economy explodes. This is the problem with the Fair Tax proposal by the way, that they want to have a 24.5 % sales tax levied just at that final retail sale. To get rates up that high you need to have a value added tax, one that is collected in increments along the supply chain. We've already done this experiment over here and Europe and that is indeed the outcome.

But that's not the only way to do it and the more advanced ideas for a progressive consumption tax become rather more interesting. What will happen is that everyone fills in a tax form, very similar to the 1040 of today. You record your income, as usual, but all of that income that you have saved is deducted before whatever the tax rate is is applied. You can think of this as being a little like all of your savings, of any type at all, as being in a tax-free 401 (k) if you like. However, all of the money that you've taken out of your savings that year is added to your taxable income. Any profits, capital gains, dividends, interest, any of these are treated exactly the same as any other income. If you've kept them in savings then they are not taxed: if you've taken them out of savings and spent them on consumption then they are added to your other income and taxed at whatever rate.

This is what is really meant by a progressive consumption tax. That your savings, returns to capital, corporations, are not taxed at all, because they are the most expensive taxes in the form of deadweight costs. Only that portion that is spent on actual consumption is taxed. And as long as we meet the condition that we have rising average tax rates, achievable with a flat tax plus an allowance, then this tax system is indeed progressive.

This sort of progressive consumption tax has a lot of support among the wonks in academe. Sadly, it has almost none at all among the political classes. Ho hum.

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Bill Gates Points To The Best Tax System, The Progressive Consumption Tax

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In a meeting at the AEI Bill Gates points to what economists will argue is the best possible tax system, the progressive consumption tax. It's worth pointing out the details of quite why economists think this is such a good tax: I think tax structures will have to move [...]

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Alan Greenspan, the former chairman of the Federal Reserve, opined on "Meet the Press" last month that to cope with the growing federal deficit the United States should go back to the federal income tax rates of the Clinton years. Such a step would raise tax rates for all American taxpayers.

I was reminded of that remark earlier this week at this year's Princeton Conference on Health Policy, organized by the Council on Health Care Economics and Policy, housed at Brandeis University's Heller School for Social Policy and Management.

In a session on "Future Health Care Spending: Political Preferences and Fiscal Realities," Henry J. Aaron of the Brookings Institution presented this fascinating chart:

Center on Budget and Policy Priorities, based on estimates from Congressional Budget Office

Dr. Aaron was quick to add that he took the chart directly from an analysis by the Center on Budget and Policy Priorities. The chart illustrates how prominent a role the tax cuts of 2001 and 2003 have played in the buildup of deficits and public debt in the United States.

An additional factor, of course, has been the economic downturn (dark blue), along with two wars. Evidently, the stimulus package (the bulk of the "recovery measures") played a role as well, although probably not nearly as prominent a role as seems to have been widely assumed.

This next chart, taken from a report by the Congressional Budget Office, illustrates more clearly the shock that the deep recession brought on by the financial crisis dealt to American fiscal policy, on top of dubious decisions in those policies.

Congressional Budget Office, Feb. 15, 2011

It can be seen that the "politics of joy" - granting tax cuts without commensurate cuts in government spending - began in earnest in the 1980s. That strategy was briefly interrupted by President Clinton who, as legend has it, was converted by his Treasury secretary, Robert Rubin, to worship the bond market and therefore sought to keep interest rates low by sharply lowering the federal deficit.

In that lapse into fiscal responsibility the Clinton-Rubin duo found support, after 1994, with a Republican Congress and a House of Representatives firmly led by Newt Gingrich.

Sadly for fiscal policy, the politics of joy was revived with the tax cuts of 2001 and 2003. To my mind, the pièce de résistance of that era was the Medicare Prescription Drug, Improvement and Modernization Act of 2003, which bestowed on the nation's elderly, known to be active voters, a large and generous entitlement that was entirely financed by the deficit. It is projected to add close to $1 trillion to the federal deficit during the current decade alone, and much more in decades beyond.

Starting in 2008, the deep recession saw federal tax revenues plummet as federal outlays soared, driven in part by economic stabilizers like unemployment insurance. Large deficits are a natural byproduct of deep recessions.

As early as January 2009, two weeks before President Obama took office, the Congressional Budget Office projected in its " Budget and Economic Outlook " a federal deficit of close to $1.2 trillion. As the chart above shows, the federal government now budgets with red ink as far as the eye can see.

The chart demonstrates a chronic affliction of American politics aptly diagnosed by Douglas W. Elmendorf, director of the Congressional Budget Office:

The United States faces a fundamental disconnect between the services that people expect the government to provide, particularly in the form of benefits for older Americans, and the tax revenues that people are willing to send to the government to finance those services.

Note that Mr. Elmendorf does not accept the usual folklore - that Americans are inherently mature and fiscally responsible and are victimized by a sinister, alien force called government. Rather, he asserts that we, the people, have time and time again favored at the ballot box politicians who promise tax cuts, even though a mature people would have noticed long ago that government spending will never be cut commensurately - mainly because, as voters, we do not countenance major spending cuts, either.

We are now seeing this adolescent posture on fiscal policy playing out once again, as voters angrily react to the recently passed House of Representatives budget plan. And it explains why my friend and fellow economist Eugene Steuerle of the Urban Institute, who served at the Treasury under President Reagan, has aptly and with exasperation named his periodic column on United States fiscal policy: The Government We Deserve."

Looking at the Congressional Budget Office's chart, I came away convinced that Mr. Greenspan had it right: given what we, the people, expect the federal government to deliver - including, once again these days, a social insurance program called "federal disaster relief" - the only way to avoid a looming fiscal disaster would be to return to the higher taxes across the board that prevailed during the Clinton administration. (An alternative would be to bite the bullet and adopt a value-added tax, as other nations have done.)

Would this make America a relatively overtaxed nation? Not by international standards, as can be inferred from data regularly published by the Organization for Economic Cooperation and Development.

Organization for Economic Cooperation and Development tax database

There is little evidence of a strong, negative correlation between total taxes as a percentage of G.D.P. and economic growth, as is suggested by the chart below (for a similar perspective, see this).

Organization for Economic Cooperation and Development

This is not to say, of course, that a nation's rate of economic growth is impervious to the composition of its total tax burden - what fraction of taxation comes from levies on business income compared with that on individual incomes, the level of marginal income-tax rates and so on.

One should think, for example, that judiciously targeted investment tax credits would encourage economic growth, or tax preferences for start-ups.

On the other hand, it has never been clear to me in what way granting tax preferences to gains from trades in already existing assets - like those on long-term gains on already issued stock certificates or gains on speculating on the value of already built real estate - feeds economic growth.

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Alan Greenspan, the former chairman of the Federal Reserve, opined on "Meet the Press" last month that to cope with the growing federal deficit the United States should go back to the federal income tax rates of the Clinton years. Such a step would raise tax rates for all American taxpayers.

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success of each system, differences

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Introduction

Catherine the Great is supposed to have said, "A great wind is blowing, and that gives you either imagination or a headache." In Washington, winds are stirring for corporate tax reform. But while there is broad bipartisan agreement that tax rates should be reduced,[1] there is less consensus regarding what the tax rate should be, how to pay for a tax cut, or generally how to treat international business income. These considerations are inextricably intertwined because the U.S. assesses its corporations on worldwide income.

Beyond imposing the highest top marginal tax rate in the developed world,[2] the U.S. tax system's treatment of international business income is exceptionally burdensome. It inflicts tremendous compliance costs, creates enormous distortions of economic activity, deters companies from headquartering in the U.S., awards tax preferences to politically connected industries, and traps huge amounts of U.S. corporate profits overseas. To add insult to injury, despite these punitive features, the system captures a meager stream of tax revenue.

To address these structural flaws, recent years have witnessed a steady march of tax reform proposals from both sides of the aisle and from several independent advisory boards and agencies. Though reform plans vary widely in their specific provisions, they follow one of two general approaches to taxing international business income: "worldwide" basis versus "territorial" basis.

Under the worldwide approach, all income of domestically-headquartered companies is subject to tax, including income earned abroad. To avoid double taxation of the same income base, worldwide systems provide credits for taxes paid to foreign governments. The overarching purpose of the worldwide design is to "create equality among resident taxpayers," so as not to distort the investment decisions of domestically headquartered companies toward low-tax countries.[3]

Figure 1. Territorial and Worldwide Systems in the OECD

Territorial Systems

Transition Since 2000

Worldwide Systems

Top Marginal Tax Rate[4]

Czech Republic

2004

Korea

24.2%

Estonia

2005

United States

39.2%

Finland

"Territorial" designation signifies broad exemption for dividends received from foreign affiliates. This includes widespread exemptions built into tax treaties (Canada) and EU conventions which exempt dividends received from affiliates within the EU (Poland and Portugal). Worldwide designation signifies relief from double-taxation with limited credits.[5]

Under the territorial approach, a country collects tax only on income earned within its borders. This is typically accomplished by exempting from the domestic tax base the dividends received from foreign subsidiaries. The territorial design thus equalizes the tax costs between international competitors operating in the same jurisdiction, so that all firms may compete on a level playing field, and capital may flow to where it can achieve the best after-tax return on investment.[6]

The U.S. system is considered a worldwide system though like other worldwide systems it allows its companies to defer tax liability on foreign "active"[7] income until it is repatriated (i.e., returned) to the United States. Deferral has been noted as critical to the stability of the U.S. international business tax system because it enables U.S. companies to compete on a near-level playing field with companies domiciled within more favorable tax climates, as long as those companies can afford to keep the resulting earnings abroad.[8]

It is not by coincidence that the territorial system has gained so many adherents; it provides very real economic advantages over its worldwide counterpart. In the case of the U.S., a transition to territorial taxation would free the $1.7 trillion dollars currently locked out of the U.S,[12] place U.S.-based companies on equal footing with competitors in every market,[13] reduce complexity and compliance costs,[14] reduce the incentive to reincorporate abroad,[15] and could be accompanied by improvements to anti-abuse protections.[16]

Yet President Obama and like-minded lawmakers want to purify the worldwide elements of the U.S. system. They see foreign investment by U.S. companies as displacing investment in the U.S. and seek to increase the U.S. tax penalty for investing abroad by repealing or further limiting deferral. Accordingly, advocates of the worldwide system consider territorial taxation an egregious concession to multinational corporations and claim it would result in a transfer of jobs, investment, and tax revenue to foreign countries.

A Case Study Approach

Another way to analyze the claims about a transition to territorial taxation is to look at the performance of major economies that use territorial systems. By examining real-world cases and looking at recent transitions, we can gauge whether the theoretical concerns about territorial taxation may be warranted. This approach, which is largely missing in the policy debate, is intended to clarify the implications of a U.S. policy change.

First we will look at the aggregate performance of the two systems, comparing the territorial and worldwide country averages among OECD members for outbound foreign direct investment, unemployment, and corporate tax revenue since 2000. This will come with some discussion of economic theory to put the numbers in context. Second, we will look at two countries that recently went through transitions from worldwide to territorial systems: Japan and the UK. Though a third case would be desirable, other countries have transitioned gradually, with exemptions first built into treaties. These two countries have the unique ability to inform a U.S. transition because their previous worldwide systems were similar to the current U.S. system. Finally, we will consider three countries that have operated territorial systems throughout the post-WWII era: Canada, Germany, and the Netherlands. These countries represent among the largest economies with relatively pure territorial systems.

It is critical to point out from the onset that correlation is not causation. A great many factors influence international investment flows, unemployment rates, and tax revenue. In addition, the selection of countries into the two tax system groups is not random; territorial systems first gained popularity in Europe, worldwide systems are now generally limited to close allies of the U.S., and countries self-select their tax system based on their own unique economic position or treaty requirements. It is therefore beyond the scope of this analysis to provide any evidence of a causal link between the tax system type and the metrics of interest. On the contrary, this analysis should demonstrate that any claims of the system's causal influence on unemployment and tax receipts should be greeted with caution. As we shall see, the trends of recent history demonstrate no clear correlations between the system type and unemployment rates or corporate tax revenue.

Aggregate Statistics

Foreign Direct Investment (FDI)
The most common objection to territoriality is the notion that it would result in increased investment abroad and reduced domestic investment by U.S. multinational companies. As Jane Gravelle noted before the House Committee on Ways and Means, "it is pretty obvious... if you lower the tax abroad, capital is going to go abroad."[20] The concern with greater outflows of FDI is that when corporations invest abroad, it seems logical that some investment, and jobs, might be displaced at home. Depending on the balance of U.S. investment abroad, foreign direct investment into the U.S., and domestic savings rates, great outflows of capital could lower the potential U.S. capital stock, and lower capital stock means lower worker productivity and lower wages. In other words, the idea is that after a policy change, more U.S. dollars would fuel foreign investment, which would increase foreign worker productivity and wages, and there would be no offsetting effects to promote employment and wages in the U.S.

Desai, Foley, and Hines conclude that "[n]either firms nor economies operate on such a zero-sum basis, and the average experience of US manufacturing firms over the last two decades is inconsistent with the simple story that foreign expansions come at the cost of reduced domestic activity."[24] Growth abroad stimulates greater demand for productive factors in the United States, particularly in management, R&D, and other high-skill capacities.

As evidenced by Figure 2, above, territorial systems are associated with greater outflows of foreign investment.[28] This comports with theory, because territorial systems do not impose additional home country tax costs on foreign earnings and those additional taxes discriminate against international investment opportunities for companies domiciled in worldwide systems.

Those who subscribe to populist notions of a zero-sum world, in which a dollar invested abroad means one less at home, will see this as evidence to stay away from a territorial system. But, as has been outlined, the global economy is not a zero-sum operation. Foreign investment boosts firm-wide productivity, provides access to new factors of production, and opens new markets for selling. This promotes the health of companies and the economies in which they operate.

Further, U.S. companies have historically underinvested abroad compared to their counterparts in other advanced economies. Figure 3 demonstrates that while the U.S. has caught up with the OECD weighted average since 2009, companies based in other countries have tended to be more effective at seizing growth opportunities abroad.

Unemployment
For opponents of territorial taxation, the primary implication of increased investment abroad is that U.S. capital would go to employ foreign rather than domestic workers. However, there is no evidence of this in terms of OECD unemployment rates. Figure 4 demonstrates that the cross-country simple average unemployment rates have trended closely together since 2000. Through much of this period, the average territorial country has had a lower unemployment rate than the average worldwide country.

The chart for average unemployment weighted by GDP (Figure 5) tells a slightly different story: territorial systems were associated with higher average unemployment until the onset of the global recession in 2008. Unemployment in worldwide countries spiked in 2009, led primarily by meltdown in the United States. Territorial systems, however, appear to have experienced relative insulation of domestic labor forces in recent years. They experienced only marginal increases in unemployment in 2008, and their figures have held relatively constant. Since 2008, the weighted average unemployment rate has favored territorial systems.

As mentioned earlier, these trends are largely due to the selection of countries that happen to subscribe to each system and other macroeconomic factors. As European sovereign debt crises push the EU closer to the brink of Euro collapse, it is possible that the average unemployment rates in territorial systems, largely represented by European nations, will rise above unemployment rates for worldwide systems.

The trend in the U.S. and other developed countries has been that low value-added work has been moved to developing countries, but domestic labor has developed expertise in high value-added work. Harrison and McMillan find that at the firm level, corporate employment growth abroad is correlated with employment growth at home, especially when the production process is diversified across international boundaries.[32] Surveys by both McKinsey[33] and the Brookings Institution[34] generally conclude the same: Any employment effects of foreign investment are negligible relative to the U.S. economy and its annual turnover, and the gains more than offset the costs of temporary worker dislocation. Economy-wide, overseas production does not change the aggregate level of employment, but results in "a change in composition...toward more managerial and technical employment."[35]

It is also critical to note that foreign investment usually does not represent a factory "moving" out of the United States. When Starbucks opens a new store in the Philippines, this is not at a cost to U.S. workers. Starbucks builds where local demand is unsatisfied and this tends to be the case for larger capital-intensive investments as well. It is well documented that employment by U.S. companies abroad is closely related to the locations of sales and is therefore focused among major U.S. trading partners.[36] This is demonstrated by the latest Bureau of Economic Analysis data, presented in Figure 6. Sixty-four percent of the variation in employment across nations can be explained by sales.[37] This means that location of sales is a very strong predictor of where U.S. companies will employ foreign workers. Granted, this does not control for other factors that might affect employment abroad, such as GDP, GDP per capita, or distance from the U.S., but the simple correlation suggests that the most important factor is the location of sales.[38]

As a final illustration, consider the case of Otis Elevator. In 2011, 15,000 elevators were sold in the U.S., but 380,000 were sold in China. To compete for new installations, control transport costs, and win maintenance contracts in the growing Chinese market, Otis must be physically present in China. Sales resulting from foreign investment fuel high-value employment at home, not only in management positions, but also in research and development capacities. In addition, the company's intellectual property, including patents, resides in the U.S., and according to Otis management, "keeping that high-value work [in the U.S.] is highly dependent on Otis' success around the world."[39] Because foreign sales comprise roughly 46 percent of sales for the S&P 500,[40] companies must actively invest in these growing markets to grow payrolls back in the U.S.

Tax Revenue
Skeptics of territorial taxation are concerned that lowering the effective tax rate on foreign earnings would induce greater levels of profit shifting into low tax countries, thus avoiding U.S. tax. Profit shifting occurs when taxable income is "reported in a jurisdiction different from that in which it would be reported absent an action taken by management where a motive for the action taken is to reduce the overall tax burden."[41] The most common avenues for profit shifting involve intra-firm trades (known as transfer pricing), location of debt, and the location of patents and other intangible property, which enable firms to overstate taxable income in low tax jurisdictions and understate income in high tax jurisdictions. Such activity erodes the base of income subject to domestic tax, thereby reducing domestic tax revenues.[42] It is argued that removing the repatriation tax burden would increase the incentive to shift profits.

Like unemployment, however, there is no evidence of this relationship when comparing the actual experiences of territorial and worldwide countries. The simple averages of corporate tax revenue as a share of GDP for the two systems have trended closely together in recent history, but from 2000 to 2009, territorial systems raised more revenue in nine out of ten years (Figure 7, above).

Figure 8 compares the GDP-weighted average revenue (right vertical axis) to GDP-weighted average tax rates (left vertical axis) for each system. GDP-weighted average revenue for worldwide systems tends to register lower than the simple average in Figure 7 because the weighted measure gives relative importance to U.S. performance and the U.S. system has collected very little revenue in recent years. While average tax rates for territorial systems have dropped at a much quicker rate than worldwide systems (again due to the U.S. maintaining its 35 percent tax rate), according to GDP-weighted averages, territorial systems have raised more revenue in eight of the ten years.[43]

Again, economic theory sheds some light on this seemingly counterintuitive result. First, territorial systems generally do not have foreign tax credit systems like the U.S. system. Under current law, U.S. companies "shield" passive income from taxes with credits for taxes paid to foreign governments. Without such a shield in territorial systems, full taxation of global passive earnings can lead to substantial tax revenue.[44] Territorial systems differ on the extent to which passive income is brought into the tax base, but no system exempts it entirely.

Fourth, and perhaps most importantly, territorial systems protect the base of business activity and capital ownerships within a country. One academic has declared that territorial systems will necessarily collect more revenue in the long-run because companies will avoid organizing business activity within worldwide systems.[51] Despite Congressional efforts to thwart corporate inversions, there are still several simple strategies for U.S. companies to reincorporate in tax-friendly jurisdictions.[52] In recent years, numerous large U.S. corporations such as Aon, Eaton, and Ensco have moved their headquarters abroad, taking their capital ownership out of the U.S. tax base.[53] This results not only in fewer high-skill U.S. jobs, but reduces global and national welfare as productive resources are allocated inefficiently.[54]

The experience of other developed economies demonstrates that when countries attempt to poach revenue from income earned in other countries, they tend to receive no more than their territorial counterparts. Though the net revenue effect of a U.S. transition would depend greatly on specific anti-abuse rules and the extent to which passive income is brought into the tax base, there is no evidence in the experience of other countries to indicate that a U.S. transition would necessarily lead to loss of revenue.

Country Case Studies

Because the particulars matter, it makes sense to look at the experiences of individual countries and their approaches to international taxation. In terms of transition to territoriality, the two most relevant cases are Japan and the UK, which both adopted territorial designs in 2009. These cases are unique because both systems were very similar to the current U.S. system prior to the policy change, and the transitions were motivated by economic ills similar to what the U.S. is currently experiencing. While a third case would be helpful, other countries have tended to adopt territorial systems in phases over time. Particularly for EU members, countries tended to build foreign dividend exemptions into bilateral tax treaties and subsequently adopted broad exemptions either for affiliates within the EU or all foreign affiliates.

The final three case study countries are Canada, Germany, and the Netherlands. These cases serve to demonstrate the long-run performance of territorial tax systems and to highlight that these countries have overcome the theoretical pitfalls suggested by skeptics.

Territorial systems vary greatly in design. Differences include the levels of dividend exemption, threshold ownership requirements, expense allocation rules, and other stipulations that income must meet to qualify as exempt.[55] Each system also has unique base-erosion measures to guard against income shifting. All territorial countries, however, exempt from tax all (or 95 percent) of the dividend earnings associated with active engagement of its companies abroad. For each system described below, these provisions will be briefly outlined, in order to better inform the debate and highlight some of territorial taxation's "best practices."[56]

Japan

"Through the introduction of this system, the profits repatriated into this country are anticipated to be put to use for vitalization of the Japanese economy in the wide-ranging and various fields, such as capital investment, research and development, employment, etc." -Japan Tax System Council, 2008[57]

Prior to 2009, "Japan's international tax system bore a remarkable resemblance to that of the United States."[58] It taxed on a worldwide basis, provided foreign tax credits, allowed deferral of tax on active income until repatriation, and claimed the highest corporate tax rate in the developed world. In introducing the 2009 budget, however, the Japanese Minister of Economy, Trade, and Industry (METI) announced that his country would pivot to a policy of territorial taxation as part of a "new growth strategy" designed to stimulate innovation in Japan through strengthening the competitiveness of Japanese firms in foreign markets and encouraging repatriation of overseas earnings.[59]

In the run-up to 2009, Japan's leaders became very concerned with the accumulation of foreign earnings held overseas, which increased from ¥138 billion ($1.1 billion) in 2001 to ¥3.2 trillion ($28 billion) by 2006. Officials believed that this pool of earnings represented foregone investment in Japan, and that the barrier to repatriation increased the risk that R&D operations would be moved abroad.[60] Before the policy change, a survey by METI found that 21 of 46 companies intended that they would spend repatriated earnings on upgrading domestic production and R&D facilities.[61]

A second concern was the competitiveness of Japanese firms in the world marketplace. With an aging and shrinking population, officials recognized that sustained economic health would originate in growth of Japanese firms abroad. A simpler, territorial system, it was thought, would allow firms to grow abroad and "ultimately lead to additional investments and job creation within Japan."[62] To further promote the competitiveness of its companies and attract investment, Japan also announced plans to lower its corporate tax rate by five percentage points, bringing its combined rate just below the U.S. combined rate. According to one Japanese tax professional, "the government concluded that the adoption of a foreign dividend exemption system itself would not unduly influence corporate decisions as to whether to establish or move operations overseas."[63]

Japan produced an international tax system with a 95-percent exemption for foreign-source dividends, which also permits deductions of all "necessary and reasonable expenses" associated with foreign income on home country taxes.[64] To guard against erosion of the corporate tax base through income shifting, Japan enacted a series of strict transfer pricing and reporting regulations.[65] It now imposes rules based on effective tax rates of controlled foreign corporations; if any subsidiary pays an effective tax rate to foreign tax authorities of less than 20 percent and cannot prove that it is actively engaged in business, the dividend exemption does not apply.[66] The system also imposes "thin capitalization rules" to limit the ability of corporations to take on excessive debt on behalf of foreign affiliates, because the interest would otherwise be deductible for tax-exempt foreign earnings.[67]

The government reported that dividend remittances increased 20 percent from 2009 to 2010, indicating that the policy may have induced the intended effect.[68] Japanese repatriation again made the news in 2011, as Japanese firms announced they would repatriate foreign earnings to help finance the post-tsunami recovery.[69] It is also worth mentioning that the Wall Street Journal reports that "Japanese companies are in the midst of the biggest boom in overseas investment the country has ever seen."[70] They have been aggressively acquiring foreign companies and engaging the global markets just as the policy intended.

The consequences for U.S. policy are perhaps best captured in the recent musings of Mieko Nakabayashi, a member of the Japanese House of Representatives. He observes:

With most of the world-Japan included-cutting corporate tax rates and employing territorial tax systems to remain competitive, the U.S. must surely know that its hesitancy to do these things is handing the advantage to its international competitors. They will suffer from that hesitancy while we and others outside the U.S. will benefit.[71]

Data
Since the policy change in 2009, Japan's unemployment rate has trended downward, similar to the OECD average (Figure 10, above). Relative to ten years ago, Japan's unemployment rate has been reduced, contrary to the U.S. or OECD averages. In addition, economy-wide wages have picked back up after a sustained drop off from 2006 to 2009 (Figure 11).[72] These phenomena are not entirely attributable to the territorial system, particularly because of Japan's concurrent struggle with the strength of the yen, the global recession, the beginning of recovery, and the 2011 tsunami, but the tax policy transition itself has certainly not dealt an obvious blow to the Japanese labor force.

Regarding corporate tax receipts, the Japanese government reports that it increased collections in 2010 and projects that receipts will remain stable for fiscal years 2011-2012 (Figure 12).[73] The OECD also reports that receipts ticked up as a share of GDP in 2010, and Japan's score remains higher than the OECD GDP-weighted average (Figure 13).[74] Though corporate tax receipts are sensitive to a host of factors, particularly growth in the economy, it appears that the territorial system has not caused immediate erosion of the tax base.

What do these data tell us? In the first three years of the new territorial taxation policy in Japan, not one of the popular fears has become a reality. While outbound FDI is up from 2009,[75] this is by the design of Japanese policymakers; foreign investment represents new growth opportunities for the domestic Japanese economy as its companies engage the world marketplace. The unemployment rate is down, wages are up, and corporate tax revenues have remained stable. This is antithetical to what opponents of the territorial system might expect.

United Kingdom

"Let it be heard clearly around the world-from Shanghai to Seattle, and from Stuttgart to Sao Paolo: Britain is open for business." -Chancellor George Osborne, 2011[76]

Like Japan, the United Kingdom's international tax system looked very similar to the U.S. model until very recently. Whereas Japan was primarily concerned with the trapped foreign earnings problem, the UK was more concerned with issues directly related to its firms' competitiveness. In 2006, Her Majesty's Treasury opened talks with business leaders with the express purpose of developing a more competitive international tax system. Though competitiveness remained the chief aim of tax reform throughout the process, other motivations included steep compliance costs and ineffective anti-avoidance measures of the older system.[77]

In 2008, a string of business emigrations prompted "intense discussions among lawmakers and businesses about the competitiveness of Britain's tax system." The New York Times described three particular outgoing firms as just part of the "exodus of British companies fleeing the tax system."[78] This publicity breathed life into tax reform efforts, which came to fruition in 2009. In the wake of the new legislation, the Financial Times reported that more than half of companies had considered leaving the UK but that the "exodus has slowed down, partly because of Treasury reforms."[79]

For the 2011 budget, Chancellor George Osborne proclaimed that the highest ambitions for the British economy were to "have the most competitive tax system in the G20," and "be the best place in Europe to start, finance and grow a business."[83] Along with tax rate reductions, the transition to a territorial system has served British ambitions. Within days of the announcement, two of the twenty-two recently inverted companies announced that they would consider a move back to the UK.[84]

According to the OECD, the unemployment rate ticked up slightly in 2010 and 2011, rising to meet the OECD average (Figure 14, right). However, if we look closer at the latest data from the British government, we see that unemployment has generally leveled off since the July 2009 policy change (Figure 15, right).[85] The worsening Euro crisis has stalled economic growth for the UK and its trading partners, but labor outcomes in the UK have not appreciably deteriorated since the inception of territorial treatment of foreign income.

Since the policy change in 2009, corporate tax receipts have increased despite a tax rate cut in 2011 (Figure 16). Again, this is not to suggest that the territorial system caused the revenue increase-particularly because the policy change was concurrent with GDP growth recovery. Nonetheless, revenue has only increased since the transition to territorial taxation. OECD statistics on revenue as a share of GDP also confirm that it increased in 2010, the first year after the policy changed, in line with the OECD trend (Figure 17).[86]

While outbound FDI as a share of GDP picked up slightly in 2011, just surpassing the total OECD figure[87] (not shown), it does not appear that the infant territorial system in the UK has created problems for British workers or government coffers. Again, the popular fears about territorial taxation have not come to fruition in the case of the UK.

Canada

"It is important to ensure that Canada's system of international taxation continues to promote the competitiveness of Canadian businesses internationally and to attract new foreign investment to Canada." -Advisory Panel on Canada's System of International Taxation, 2008

Despite its very competitive system, Canada has not slowed its efforts to continually improve its tax competitiveness. Since 1998, its combined corporate tax rate has been lowered from 42.9 percent to 27.6 percent.[94] In 2007, it adopted rules to apply the dividend exemption to affiliates in countries with a bilateral Tax Information Exchange Agreement (TIEA),[95] and the government's 2008 "Advisory Panel on Canada's System of International Taxation" recommended that the existing exemption system be expanded further to cover all active foreign business income.[96] Further, recognizing that foreign investment yields benefits to the home economy, Canadian officials actively facilitate foreign investment by Canadian companies.[97]

In spite of fears that foreign investment displaces domestic investment to the detriment of the home economy, the case of Canada demonstrates that foreign engagement, territorial taxation, and competitive tax rates can promote better economic performance. Canada's economy has grown at an average real rate of 2.61 percent since 1995, which is 0.2 points stronger than the U.S. average and 0.4 point stronger than the OECD average.[98]

This has translated into more jobs in the Canadian economy. Unemployment has trended downward since the 1980s, and the Canadian labor force was not as affected by the global recession as was the U.S. labor force. As of 2011, the unemployment rate in Canada sat 1.5 points below the U.S. rate (Figure 18, above).

The most remarkable lesson from Canada is that territorial systems are capable of yielding substantial and consistent tax revenues, even through periods of recurring tax cuts (Figure 19). Canada has lowered its tax rate from 42 percent to 27.6 percent since 2000, yet tax revenues have tended to grow faster than GDP. The Canadian territorial system has consistently out-collected the U.S. worldwide system despite higher tax rates in the U.S.

Germany

Germany has successfully implemented a system of taxation of foreign earnings, which is driven by two principles: competitive neutrality and simplicity. -Jorg Menger, German tax professional, 2011[99]

Since 1920, the German corporate tax system has exempted foreign dividend income to some degree. In 1954, Germany initiated a tax treaty system whereby dividends originating within treaty-partner countries became fully exempt. To simplify this regime and to comport with rulings of the EU Court of Justice, in 2001 Germany reformed its system to terminate international expense allocation requirements and to allow deductions for all expenses related to exempt foreign income. To compensate the government for allowing deductions for costs related to tax-exempt foreign income, Germany reduced the exemption for foreign income to 95 percent, allowing tax on the residual five percent.[100]

To make the tax system more competitive for its companies in the international marketplace, Germany has recently engaged in a series of tax rate reductions. Since 1998, Germany has reduced its combined tax rate on corporate income from 56 percent to 30.2 percent.[104]

While operating a territorial system throughout the modern era, Germany has emerged as one of the most robust economies in the world and is considered the European continent's "economic giant."[105] Its GDP per capita is $40,116, ranking in the top decile of all countries, and it is the third-leading exporter in the world. [106]

Regarding unemployment, there has been much volatility since the reunification of West and East Germany in 1990. While unemployment trended upward for several periods and reached a high exceeding 11 percent in 2005, the rate has been cut in half since that time, due in part to labor market reforms.[107] By 2011, it registered at 5.9 percent (Figure 20, above) and Eurostat reports that it is now down to 5.4 percent.[108] While much of the developed world experienced spikes in unemployment as a result of the global recession, Germany experienced only a hiccup before its rate continued downward.

Germany traditionally has not relied heavily on corporate tax revenue (Figure 21). German policymakers have recognized the tradeoffs inherent to international taxation and as one of the world's leading exporters, have chosen to promote the competitiveness of their companies. While the German government may be leaving a lot of potential revenue on the table, it recognizes that foreign earnings are a fugitive base from which to extract revenues.

The Netherlands

Companies that are healthy and grow internationally will be able to capitalize on opportunities that solely domestically operating companies will not be able to seize on. This will have a positive impact on profits and employment in the residence state. In that sense one can say that if international expansion is good for the company, it is good for the country. -Paul Vlaanderen, Director of International Tax Policy and Legislation, Netherlands Ministry of Finance, 2002[109]

The origins of the Dutch dividend exemption go back to 1893, when it became "one of the pillars" of the tax system.[110] According to Paul Vlaanderen, former director of Dutch international tax policy, there are two reasons that the Netherlands has always exempted foreign profits. First, the country respects the fiscal sovereignty of other nations to tax the business profits realized within their own jurisdictions (the "benefit principle"). Second, the Netherlands recognizes that its domestic market of 16 million people is too small to sustain growth for its innovative companies. To penetrate foreign markets and gain global market share, companies must be able to compete with other multinationals on "a level playing field" and from "an equal tax position."[111]

For foreign dividends that are not exempt, double-taxation is mitigated with a foreign tax credit and a deferral regime. However, if a Dutch company holds 25 percent or greater of the stock in a foreign passive or low-tax asset, "the annual change in the value of the holding forms part of the Dutch taxable income." This reevaluation approach differs from most other territorial jurisdictions.[115]

The Netherlands permits deductions for costs associated with exempt foreign earnings against domestic taxable income, but there are limits on deductibility of interest payments. For a firm to deduct the costs associated with external financing, it must prove that the debt issue is relevant to the gain of taxable domestic income. The same scrutiny is applied to loan costs associated with foreign acquisitions.[116] If ever debts are deemed "excessive" by tax authorities, the interest costs are not deductible.[117]

To stimulate job creation and innovation in the Netherlands, the "innovation box" regime subjects qualifying income from intangible assets to a tax rate of just five percent. This regime, similar to the UK "patent box," is aimed to eliminate the incentive to shift intangible property and income into tax havens. In addition, the Dutch system is noted by tax professionals to offer "ample possibilities for deducting expenses from gross income and a favourable treatment of losses."[118] Due to its taxpayer-friendly approach and low tax burdens, the Netherlands is the registered home to many holding companies, and KPMG has ranked the Dutch corporate tax system as the most attractive in Europe.[119]

The unemployment rate in the Netherlands has trended downward since the early 1980s. Particularly since 1998, Dutch employment figures have consistently scored better marks than the U.S., and in 2011, unemployment in the Netherlands was half of the U.S. figure (Figure 22, above). This occurred while the Dutch pursued a policy of foreign engagement and outbound investment. This is not to suggest that the territorial tax system is the primary driver of positive labor market outcomes in the Netherlands, but the territorial system has clearly not prevented these outcomes.

Perhaps just as shocking is the Dutch system's tax revenue performance. It has consistently out-yielded the U.S. system, as well as the OECD average, until very recently (Figure 23). In only one of the last thirty years did the U.S. worldwide system collect more tax revenue as a share of GDP than its Dutch counterpart. And like Canada, this has occurred in the context of ever-decreasing tax rates; the top marginal rate has been lowered five times since 2001, moving from 35 percent to 25 percent. In sum, the Netherlands has operated a competitive territorial system with substantially lower corporate tax rates than in the U.S. and it has experienced better labor outcomes and greater levels of corporate tax revenue. The Dutch case specifically rebuts each of the fears associated with territorial taxation and may be held up as an international tax exemplar.

Lessons for the U.S.

The U.S. finds itself in similar circumstances to each of the transitional case studies. Like Japan before 2009, American companies' foreign profits are stockpiling abroad, locked out by a secondary tax penalty. Like the UK before 2009, many U.S. companies have explored or gone forward with moving legal residence into business-friendly tax systems. Like both countries before reform, the U.S. system is complex, out of sync with its major trading partners, and imposes heavy, uncompetitive burdens. As demonstrated, territorial systems in Japan and the UK were implemented to address these problems; preliminary evidence indicates that efforts have been successful.

Canada, Germany, and the Netherlands demonstrate that territorial tax systems can yield sufficient revenues while minimizing the distortions of corporate behavior. In addition, their experiences reveal that home labor markets are not harmed by territorial taxation; all real-world evidence points to the contrary. Importantly, these cases are not the few successful "cherry-picked" outliers of the territorial experience, as evidenced by the aggregate statistics reported previously. The dramatic upsides of territorial taxation come with minimal or potentially nonexistent downsides.

Best Practices

This case study analysis also highlights the variable approaches countries have taken to territorial taxation. Some countries, like Japan, have emphasized protection of the corporate tax base, to minimize incentives for profit-shifting and to promote robust tax yields. Other countries, like the Netherlands and Canada, have emphasized the competitiveness of their companies and defined narrowly what income is not eligible for exemption. Nonetheless, common themes emerge, and the following "best practices" typify competitive territorial tax systems:

Transitions to territorial taxation have been accompanied by reductions in tax rates. Though rate reductions have been a global trend in their own right, lowering the tax rate is arguably instrumental in attenuating the risks for increased profit shifting.

They narrowly define passive income, which remains subject to tax. This means that legitimate active business activity is not drawn into the passive income tax base (as happens in the U.S.[120]), and passive income tax provisions are narrowly tailored to capture income artificially shifted overseas.

They provide preferential treatment for intellectual property, with so-called "patent box" or "innovation box" regimes, to minimize the incentive to shift intangible property into low-tax jurisdictions.

They permit deductibility of expenses associated with foreign income, to ensure no disincentive for locating R&D or management activity at home. Though U.S. policymakers have considered a territorial system with expense allocation rules,[121] no other territorial system is designed in such a manner.

They limit the deductibility of foreign interest costs with "thin capitalization rules" in order to guard against abusive income stripping, but not to the extent that deductibility of legitimate borrowing costs is disallowed.

They limit profit shifting with transfer pricing rules based on the "arm's length" standard, like the U.S. system.[122]

The key point is that the U.S. could adopt a system with some mix of these basic features. Such a change would represent an improvement in terms of neutrality, efficiency, and simplicity as compared to the current worldwide system.

The Real Effects of A U.S. Transition to Territorial Taxation

If territorial taxation seems to have little influence on labor market outcomes or corporate tax revenue, what real effects could we expect from a U.S. policy change? As mentioned earlier, eliminating the tax on repatriation would invite vast sums of foreign-held earnings back into the U.S. Though it is unrealistic to expect all $1.7 trillion to return, there is evidence that a very sizable portion would flow back into the U.S. In the 2004 repatriation holiday, U.S. companies brought home $360 billion of the roughly $800 billion held abroad.[123] Following the same ratio, $765 billion could be poised for return under similar conditions.

Larry Summers, the former chief economic advisor to President Obama, appreciates the benefits of letting trapped foreign earnings return to the U.S.:

Right now the U.S. tax system, it's like a library, we're running a library. The single dumbest thing you can do is announce that you're going to have everybody think that there's going to be an amnesty on overdue books, but then not actually ever have the amnesty, because then you assure that no books are ever going to come back, and they're always not bringing back the book waiting for the amnesty which never comes, and so you never get the money. And that's what the U.S. debate is right now. Nobody in their right mind would bring in money right now with people thinking that who knows what's going to happen after the election and who knows what's going to happen next, there will be some kind or repatriation. Even if you thought you ultimately had to bring the money home, you surely would be waiting right now.[124]

In addition, territorial tax reform could substantially reduce the compliance costs for both firms and the government. Such costs now tally over $40 billion annually,[125] with a disproportionate share associated with the international requirements of the tax code.[126] If the code was simplified, particularly regarding the foreign tax credit and expense allocation regimes, tax planning expenditures would be diverted to productive uses, rather than sunk into the deadweight loss of regulatory compliance. Finally, pursuing a policy of capital ownership neutrality, by ensuring equal tax costs between U.S. firms and their competitors on foreign investment, would minimize distortions of investment and asset ownership[127] and reduce the incentive for companies to leave the U.S.[128]

The Tax Rate

Though this analysis has focused on the international tax system design, the more pressing policy concern is the U.S. top marginal corporate tax rate of 35 percent. While there are tradeoffs in moving toward either territorial or worldwide taxation, "the theme that emerges is that the harmful economic effects of either approach can be addressed by lowering the U.S. corporate tax rate."[129] Thirty of thirty-four OECD members have reduced tax rates since 2000, and the U.S. rate now exceeds the simple average of other OECD nations by 14.1 points and the GDP-weighted average by 10 points.[130] The U.S. cannot afford to be this far out of step in the face of a changing world and expect to attract investment or foster economic growth.

Conclusion

It is not by accident that 27 of 34 OECD members have territorial systems, and that every independent government tax advisory group has encouraged Congress to discard the current worldwide system in favor of a sleeker territorial model. Even two of the most outspoken critics of territoriality have recently expressed that "there is a lot to like" about the House Republicans' draft legislation for a territorial system, and that "it is worthwhile to adopt."[131]

Territorial taxation has been called "a pragmatic response to the practicalities in a world where competition is fast moving and truly global."[132] The system itself is no silver bullet to heal the economy and bring balance to the budget, but its gains come at little to no cost. The distortions associated with trapped income and the system's punitive compliance costs greatly outweigh the potential revenue concerns. As evidenced by the fact that the U.S. is now home to 43 fewer companies of the Global 500 than in 2005,[133] the competitiveness of U.S. companies is waning.

Policy should be designed to promote the free flow of capital back into the U.S. rather than to prevent companies from investing abroad. Firms should invest where they can achieve the greatest return; this is good for American investors, American consumers in terms of lower prices, and American workers in terms of greater productivity and correspondingly higher wages. Putting up barriers to growth abroad ultimately slows growth at home.

While some have argued that territorial taxation would be detrimental to the U.S. workforce, economy, and public sector, the evidence here indicates otherwise. The real-world experience of territorial taxation is that it outperforms worldwide taxation on the metrics of concern, specifically unemployment and corporate tax revenue. These lessons should contribute to the sense of urgency now building behind corporate tax reform. A great wind is blowing, and a well-designed territorial system just may alleviate the proverbial headaches.

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A Global Perspective on Territorial Taxation - Tax Foundation

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Introduction Catherine the Great is supposed to have said, "A great wind is blowing, and that gives you either imagination or a headache." In Washington, winds are stirring for corporate tax reform. But while there is broad bipartisan agreement that tax rates should be reduced,[1] there is less consensus regarding what the tax rate should ...

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important characteristics of education systems

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important characteristics of education systems

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As children return to the classroom, this is a good time to consider what makes a great school system.

In her recent book The Smartest Kids in the World, the American journalist Amanda Ripley delves into the highly reputed education systems in countries such as Finland, South Korea and Poland, and surveys the latest literature on why kids learn or don't.

The book contains many fascinating revelations and a number of prescriptions that can be boiled down to seven key lessons for educators, parents and students.

Mathematics is vital. Math is even more important than we knew. Math skills correlate highly with future income, and with academic success, research shows. Most academic superpowers forbid elementary and high school students from using calculators. They also tend to offer a far more challenging curriculum than schools in North America. The best education systems in the world focus tightly on key concepts, teach them in depth at an early age, and ensure that students master the basics from which to build.

Teachers should be highly prized. It should be difficult to become a teacher, and the job should be socially prestigious. In Finland, admission to an education program is as demanding as medical school; graduates must earn a master's degree and conduct original research to obtain it. Students, parents and bureaucrats respect teachers, because they know how hard it is to become one.

Classroom technology is a waste of money. There's no indication that fancy pedagogical doodads such as electronic whiteboards and tablets have a tangible effect on student performance. Rather, the systems that spend their money on teachers and curriculum development tend to do better.

School should be about school. Rigour is key, and the standards must be high. The best systems take learning extremely seriously, an attitude that is reflected in the broader society. In Finland, there are few extracurricular activities; if children play sports, they do it on their own time. In Poland, students wear their best suits and dresses to their annual exams. In Korea, police issue tickets to drivers who honk outside test centres and kids spend their evenings in private study facilities. Top countries also make it clear to students that learning can sometimes be hard, and includes drudgery.

Extra help is widely available. There's a recognition that students often need specialized assistance. Roughly half of all Finnish students receive some level of remedial or special education by the time they turn 17, whether it's extra attention from teachers or a specialized curriculum aimed at improving language, reading or math skills or overcoming learning difficulties, which are treated as temporary. The extra help is almost always provided in-school, and generally takes up only a portion of the day.

Critical thinking is emphasized. That means essay questions rather than multiple-choice exams, explanations rather than straight answers, and students working collaboratively on problem solving.

No system is perfect. There are union squabbles, dissatisfied parents, policy shortcomings and rampant inefficiencies in even the highest-performing education systems.

Canadian parents should be reassured that Canada's education system is actually quite good by international standards, and performs at a much higher level than that of the U.S.

But there's always room for improvement.

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Seven characteristics of great education systems

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As children return to the classroom, this is a good time to consider what makes a great school system. In her recent book The Smartest Kids in the World, the American journalist Amanda Ripley delves into the highly reputed education systems in countries such as Finland, South Korea and Poland, and surveys the latest literature on why kids learn or don't.

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east asian countries highest -- scandinavian countries are decreasing in rankings

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In Gothenburg's main square I watch as a crowd of rowdy, happy teenagers pile out of the back of a flatbed truck and set off coloured smoke bombs.

All dressed up with jaunty caps, and prom dresses they are celebrating the end of their school days with a parade.

But they are part of a generation which many now fear has been let down by the education system in Sweden.

Where did it all begin to go wrong?

Just half an hour beforehand, I was perched in a science classroom in Gothenburg with Gustav Fridolin, a former teacher, and now Sweden's education minister.

He told me that last year, more students left compulsory schooling than ever before without the qualifications needed to go further.

A series of radical reforms was unleashed on schools in Sweden in the 1980s and 1990s, and the consequences have been unfolding ever since.

Radical reforms

The reforms were once hailed by former Education Secretary for England, Michael Gove, as creating a successful autonomous school system that should be admired.

A system in which, he said, " the old bureaucratic monopoly that saw all state schools run by local government" had been ended.

It was part of the inspiration for free schools that have been set up set up in England, independent of council control. Another 500 are planned.

But now, as Gustav Fridolin freely admits, the Swedish education system is in crisis after falling faster and further than any other country in international tests in science, reading and maths.

"It's urgent, we're losing money every day, it's the biggest issue for the Swedish economy."

He says there is little agreement about which of the many changes in the 1980s and 90s is most to blame.

Sweden created a system with more choice for parents by giving them vouchers to spend in whichever school they want.

Decentralisation

More competition was created by allowing free schools to be opened by independent organisations.

At the same time there was massive decentralisation, with much more responsibility being handed to the municipalities.

Sweden v UK:

Scores on the 2012 international PISA tests, comparing educational achievement in OECD countries:

Reading:

UK 23

Sweden 36

Maths:

UK 26

Sweden 38

Science:

UK 21

Sweden 38
Pisa test results 2012
One of the largest and most successful free school organisations is Kunskapsskolan which runs 36 schools in Sweden.

It also manages some academy schools in England. The difference is that in Sweden it is allowed to make a profit.

When I visit, it is near the end of term and there is a relaxed, and very boisterous atmosphere.

The teachers tell me their results are good because pupils here are involved in setting the pace of their learning and their own targets.

Robust defence

And Cecilia Carnefeldt, CEO of Kunskapsskolan, is robust in her defence of free schools, which make up about 16% of the system.

She argues they have encouraged innovation, and allowing parents to use their vouchers in a free school or municipal school is a powerful influence on standards at a local level.

"The opportunity for parents to choose a school is really important, that will improve the quality of all schools where there is healthy competition."

An OECD review published earlier this year found the decline in standards was across all kinds of schools.

International observers found a lot of low-level disruption and, in some parts of the school system, a lack of ambition.

Teachers' pay is less than other graduate professions, and after all the criticism, morale is low.

All issues which will be looked at over the next two years by a recently created Schools Commission which will suggest changes.

Anna Ekstrom, director general of the Swedish National Agency for Education, is leading it.

"You need to have a feeling among children, among parents, among teachers that school is important. If you don't have that feeling it's very difficult to achieve higher results so I think this is maybe an area where we need to work a little bit harder in Sweden."

It's the closest she comes to admitting there may have been complacency.

More effort

Already many schools are putting more effort into teaching maths and science.

In a classroom in a municipal school in Stockholm Janna Malmgren is helping her class of pupils test bridges they have designed and built.

Each bridge is loaded with weights until the point of collapse.

Janna, who has been teaching for two years, says many are put off by a lengthy training not matched by the pay that follows.

"I can't speak for other people but I do think salary might have something to do with it, workload, definitely you hear about teachers' workload, they work so much."

Nina Jonsson, the head teacher here at the Sodermalmsskolan, accepts that results can't be ignored.

"We need to set high standards, we need to be tough on truancy and tardiness for example. "

But she says the international tests are only part of the picture.

"I think they fail to capture our innovativeness. Look at Skype, Spotify for example, they're all from Sweden. We weren't born that way, it comes from somewhere. "

In this she is in agreement with Cecilia Carneveldt from Kunskappskolan, who says they've had visitors from South Korea who want to understand how to foster creativity.

Andreas Schleicher, who leads the Directorate for Education and Skills at the OECD, is familiar with the arguments about their Pisa tests.

He says one of their innovations has been a shift from testing what students know, to what they can do with that knowledge.

These are skills which many global businesses require.

Business partnerships

The British-Swedish pharmaceutical company Astra Zeneca AB has just begun a collaboration with the world famous Karolinksa medical research institute.

At its launch Jan-Olof Jacke, president of Astra Zeneca AB, mingles with the scientists. He is a parent as well as a businessman.

He tells me what matters is that Sweden finds a way to start improving its education system now, so businesses can recruit in the future.

"As a knowledge economy, with a very significant part of our GDP coming from export, over 50%, that starts with good education. "

The latest round of Pisa tests is being carried out this year for publication in 2016.

Anna Ekstrom says the Schools Commission has been given two years to do its work, but she too understands the urgency.

"We are a small country, we live on the north pole, we really have to rely on high quality products and high quality export so for that reason the school results are very important for us."

There are real differences between Sweden and England, not least the stronger inspection regime of Ofsted.

It is also clear that the lessons from Sweden may be far less clear-cut than either the supporters or opponents of free schools would like to argue.

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In Gothenburg's main square I watch as a crowd of rowdy, happy teenagers pile out of the back of a flatbed truck and set off coloured smoke bombs. All dressed up with jaunty caps, and prom dresses they are celebrating the end of their school days with a parade.

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As the Occupy Wall Street protesters have pointed out, the strong global economic growth of the past few decades (not counting the Great Recession) left a lot of people behind. For example, the U.S. Congressional Budget Office recently reported that from 1979 to 2007 the top 1% of earners more than doubled their share of the nation's after-tax income.

For decades economists have wondered whether inequality is bad or good for long-term growth. On one hand, entrenched inequality threatens to create an underclass whose members' inadequate education and low skills leave them with poor prospects for full participation in the economy as earners or consumers. It can cause political instability and thus poses risks to investment and growth. On the other hand, some argue that because inequality puts more resources into the hands of capitalists (as opposed to workers), it promotes savings and investment and catalyzes growth.

To try to answer this question, we examined economic data from 48 U.S. states for the census years from 1960 to 2000. We discovered new evidence that inequality and growth are entwined in complex ways and found that overall, both high and low levels of inequality diminish growth.

The Gini coefficient measures income or consumption inequality on a scale from zero to 100, with zero representing a perfectly equal distribution. Here's a sampling of scores, based on the most recent data available for each country.

Source: The World Bank

We looked at the data through a number of lenses, each based on a different statistical model. Using one lens, we found a hump-shaped relationship between inequality and growth. Raise inequality above the average level in 2000, and growth declines; lower it, and the same thing happens. According to this analysis, inequality at that time was at a sort of optimum level, for lack of a better word.

Using another lens, we found a similarly hump-shaped relationship, but with the hump in a different place. From this perspective, the 2000 level of inequality is good for growth, but a higher level would, to a certain degree, be even better: A moderate rise in inequality-by one standard deviation-would increase annual growth by about 0.6 percentage points.

What are the long-term implications? The gains from rises in inequality are murky: Although our findings suggest that modest increases can generate growth, other data indicate that heightened inequality shortens growth spells and may halt growth. Reducing inequality, though, has clear benefits over time: It strengthens people's sense that society is fair, improves social cohesion and mobility, and broadens support for growth initiatives. Policies that aim for growth but ignore inequality may ultimately be self-defeating, then, whereas policies that decrease inequality by, say, boosting employment and education have beneficial effects on the human capital that modern economies increasingly need.

A version of this article appeared in the January-February 2012 issue of Harvard Business Review.

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How Much Inequality Is Necessary for Growth?

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As the Occupy Wall Street protesters have pointed out, the strong global economic growth of the past few decades (not counting the Great Recession) left a lot of people behind. For example, the U.S. Congressional Budget Office recently reported that from 1979 to 2007 the top 1% of earners more than doubled their share of [...]

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Lane Kenworthy: The Good Society

http://lanekenworthy.net/thegoodsociety/

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Foodforthought Padlet

Gapminder

World Bank

CIA World Factbook

Economic Freedom Index

Prosperity Index

World Happiness Report

World Top Income Database

Human Development Index

Human Sustainable Development Index

Genuine Progress Index

Books, Databases, Journal Articles

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In Gothenburg's main square I watch as a crowd of rowdy, happy teenagers pile out of the back of a flatbed truck and set off coloured smoke bombs.

All dressed up with jaunty caps, and prom dresses they are celebrating the end of their school days with a parade.

But they are part of a generation which many now fear has been let down by the education system in Sweden.

Where did it all begin to go wrong?

Just half an hour beforehand, I was perched in a science classroom in Gothenburg with Gustav Fridolin, a former teacher, and now Sweden's education minister.

He told me that last year, more students left compulsory schooling than ever before without the qualifications needed to go further.

A series of radical reforms was unleashed on schools in Sweden in the 1980s and 1990s, and the consequences have been unfolding ever since.

Radical reforms

The reforms were once hailed by former Education Secretary for England, Michael Gove, as creating a successful autonomous school system that should be admired.

A system in which, he said, " the old bureaucratic monopoly that saw all state schools run by local government" had been ended.

It was part of the inspiration for free schools that have been set up set up in England, independent of council control. Another 500 are planned.

But now, as Gustav Fridolin freely admits, the Swedish education system is in crisis after falling faster and further than any other country in international tests in science, reading and maths.

"It's urgent, we're losing money every day, it's the biggest issue for the Swedish economy."

He says there is little agreement about which of the many changes in the 1980s and 90s is most to blame.

Sweden created a system with more choice for parents by giving them vouchers to spend in whichever school they want.

Decentralisation

More competition was created by allowing free schools to be opened by independent organisations.

At the same time there was massive decentralisation, with much more responsibility being handed to the municipalities.

Sweden v UK:

Scores on the 2012 international PISA tests, comparing educational achievement in OECD countries:

Reading:

UK 23

Sweden 36

Maths:

UK 26

Sweden 38

Science:

UK 21

Sweden 38
Pisa test results 2012
One of the largest and most successful free school organisations is Kunskapsskolan which runs 36 schools in Sweden.

It also manages some academy schools in England. The difference is that in Sweden it is allowed to make a profit.

When I visit, it is near the end of term and there is a relaxed, and very boisterous atmosphere.

The teachers tell me their results are good because pupils here are involved in setting the pace of their learning and their own targets.

Robust defence

And Cecilia Carnefeldt, CEO of Kunskapsskolan, is robust in her defence of free schools, which make up about 16% of the system.

She argues they have encouraged innovation, and allowing parents to use their vouchers in a free school or municipal school is a powerful influence on standards at a local level.

"The opportunity for parents to choose a school is really important, that will improve the quality of all schools where there is healthy competition."

An OECD review published earlier this year found the decline in standards was across all kinds of schools.

International observers found a lot of low-level disruption and, in some parts of the school system, a lack of ambition.

Teachers' pay is less than other graduate professions, and after all the criticism, morale is low.

All issues which will be looked at over the next two years by a recently created Schools Commission which will suggest changes.

Anna Ekstrom, director general of the Swedish National Agency for Education, is leading it.

"You need to have a feeling among children, among parents, among teachers that school is important. If you don't have that feeling it's very difficult to achieve higher results so I think this is maybe an area where we need to work a little bit harder in Sweden."

It's the closest she comes to admitting there may have been complacency.

More effort

Already many schools are putting more effort into teaching maths and science.

In a classroom in a municipal school in Stockholm Janna Malmgren is helping her class of pupils test bridges they have designed and built.

Each bridge is loaded with weights until the point of collapse.

Janna, who has been teaching for two years, says many are put off by a lengthy training not matched by the pay that follows.

"I can't speak for other people but I do think salary might have something to do with it, workload, definitely you hear about teachers' workload, they work so much."

Nina Jonsson, the head teacher here at the Sodermalmsskolan, accepts that results can't be ignored.

"We need to set high standards, we need to be tough on truancy and tardiness for example. "

But she says the international tests are only part of the picture.

"I think they fail to capture our innovativeness. Look at Skype, Spotify for example, they're all from Sweden. We weren't born that way, it comes from somewhere. "

In this she is in agreement with Cecilia Carneveldt from Kunskappskolan, who says they've had visitors from South Korea who want to understand how to foster creativity.

Andreas Schleicher, who leads the Directorate for Education and Skills at the OECD, is familiar with the arguments about their Pisa tests.

He says one of their innovations has been a shift from testing what students know, to what they can do with that knowledge.

These are skills which many global businesses require.

Business partnerships

The British-Swedish pharmaceutical company Astra Zeneca AB has just begun a collaboration with the world famous Karolinksa medical research institute.

At its launch Jan-Olof Jacke, president of Astra Zeneca AB, mingles with the scientists. He is a parent as well as a businessman.

He tells me what matters is that Sweden finds a way to start improving its education system now, so businesses can recruit in the future.

"As a knowledge economy, with a very significant part of our GDP coming from export, over 50%, that starts with good education. "

The latest round of Pisa tests is being carried out this year for publication in 2016.

Anna Ekstrom says the Schools Commission has been given two years to do its work, but she too understands the urgency.

"We are a small country, we live on the north pole, we really have to rely on high quality products and high quality export so for that reason the school results are very important for us."

There are real differences between Sweden and England, not least the stronger inspection regime of Ofsted.

It is also clear that the lessons from Sweden may be far less clear-cut than either the supporters or opponents of free schools would like to argue.

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In Gothenburg's main square I watch as a crowd of rowdy, happy teenagers pile out of the back of a flatbed truck and set off coloured smoke bombs. All dressed up with jaunty caps, and prom dresses they are celebrating the end of their school days with a parade.

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Poverty statistics paint false picture of inequality

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The following editorial appears on Bloomberg View: Poverty statistics can be used to prove almost anything. When the Census Bureau reported last week that 46 million Americans, or 15 percent of the population, live in poverty, conservatives said that five decades of the welfare state have had virtually no effect.

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case study that proves income inequality increases living standards and overall economic growth

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Are we funding the govt through taxes or are we funding it through oil/other natural resources?

maybe both? depends on how much government involvemtn we want

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Arguments against income inequality come in two flavors. The first asserts that inequality is simply unfair or distasteful. Some people do not want to live in a world in which the top 1 percent of earners pulls in more than 20 percent of income, particularly when its take in Scandinavian countries is far below the American share and when today's American share is far more than the same share 35 years ago.

More commonly, those upset about income inequality appeal to the supposed consequences of inequality. Observers routinely argue that the growth of inequality has robbed the poor and middle class of their rightful share of the economic pie and even that inequality has shrunk the pie itself. They compare the United States unfavorably with various developing countries, as if our comparable inequality levels mean that America is no more appealing than some of the poorest nations in the world. For instance, Georgia Levenson Keohane, a fellow at the left-leaning Roosevelt Institute, says Americans "are living, some argue, in a North American banana republic: our income inequality is worse than that of Guyana, Nicaragua, and Venezuela. When it comes to shared prosperity, we keep company with Iran and Yemen."

Of course, the American middle class is much more affluent than its counterparts in these countries-more than three times richer than in Venezuela or Iran, and more than ten times richer than in the others. Our poorest households are similarly better off compared with the poor in these nations. In fact, despite the claims that more inequality leads to lower living standards below the top, the patterns across the developed nations of the world suggest that if anything, higher inequality is accompanied by richer middle class and poor populations.

What the Data Says about Income Inequality

I recently analyzed data on national living standards from three different sources encompassing 160 countries. I compared the living standards enjoyed by the poor and by the middle class to inequality measures from two sources. These comparisons consistently showed that once the developed nations of Europe, Asia, and the English-speaking world are distinguished from the developing world, there is a tendency for countries with more inequality to have higher living standards below the top.

These findings make sense if you are open to the idea that greater inequality might actually increase the size of the economic pie rather than shrinking it.

The one exception was that countries that have more income concentration in the top 1 percent of households tend to have poorer low-income populations. None of these point-in-time comparisons, however, constitute very strong evidence that inequality raises or hurts living standards. Any number of economic, political, cultural, or demographic factors could be operating undetected, making it look like inequality affects living standards even though something else is behind both.

Stronger evidence comes from looking at how changes in inequality relate to changes in living standards. Data from sociologist Lane Kenworthy indicate that the tendency is for countries with larger increases in income concentration within the top 1 percent to have stronger income gains not only within the middle class but among the poor.

These findings make sense if you are open to the idea that greater inequality might actually increase the size of the economic pie rather than shrinking it. That is, if economic growth is strong enough-enlarging the pie by a sufficient amount-then even though the slices going to the poor and the middle class are comparatively skinnier, they still end up with more pie. The mistake that decriers of inequality make is to assume that the economic pie is fixed, so that a bigger slice for the top must necessarily result in less pie for everyone else. In fact, the evidence from economic research over the past 15 years is that in developed countries, more inequality tends to go hand in hand with stronger economic growth.

The United States Doesn't Have More Income Inequality

My analyses focus on inequality before governments redistribute income through progressive taxes and cash transfers. Another reason that inequality does not tend to lead to lower living standards in the developed world is that below the top 1 percent, inequality before taxes and transfers does not vary much across rich countries. By the most used measure, inequality within the bottom 99 percent is barely higher in the United States than in Denmark.

By the most used measure, inequality within the bottom 99 percent is barely higher in the United States than in Denmark.

This is surprising, given how much governments can influence income inequality even before they tax and spend. Some governments have labor policies that strongly favor unions, or they set relatively high minimum wages. Government regulation can promote or retard entrepreneurship and make it more or less costly to hire workers. Some countries mandate generous vacations and paid leave. Various policies can affect marriage and fertility. Yet, setting aside how much income the top 1 percent earn, all of this "pre-distribution" appears to matter little for inequality.

The United States-and to a lesser extent other English-speaking countries-differs from continental Europe in that we redistribute much less than they do. As I show in the paper, continental Europe is unique among the nations of the world in the amount of income it redistributes.

Clearly, there are cultural factors at work. A 1999 survey asked respondents from 27 countries whether they agreed that "it is the responsibility of government to reduce differences in income." In continental Europe, the percentage agreeing ranged from 57 to 90 and was generally 70 or higher. In the English-speaking nations, the percentage agreeing never exceeded 68 and was generally 50 or lower. In the United States, just 35 percent agreed-lower than in any other country. Cultural factors are also likely to explain why the United States has higher income concentration than other countries even before taxes and transfers.

All of this matters greatly for policy debates. Increasingly, two main issues underlie all other economic disputes: (1) whether the United States should become more like Europe in its welfare state and economic institutions or whether it should remain uniquely receptive to free-market capitalism and (2) whether high and rising inequality has hurt the poor and middle class, in which case the argument that we should embrace Europe's policies becomes more attractive. The evidence suggests that inequality, if anything, leads to higher living standards for everyone. Our values and our economic performance are not in conflict.

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Arguments against income inequality come in two flavors. The first asserts that inequality is simply unfair or distasteful. Some people do not want to live in a world in which the top 1 percent of earners pulls in more than 20 percent of income, particularly when its take in Scandinavian countries is far below the American share and when today's American share is far more than the same share 35 years ago.

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