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A Project of The Annenberg Public Policy Center

Christie’s Tax Dodge


Chris Christie repeatedly has said that U.S. corporations are taxed twice on income earned abroad, claiming in one speech that IRS officials  “don’t recognize the tax you paid to a foreign country.” That’s false.

It’s true that the U.S. is “one of the few countries in the world,” as Christie put it, that subjects foreign earnings to both U.S. and host-country income taxes. But the IRS provides a foreign tax credit to prevent double taxation.

“Gov. Christie is wrong to say that we tax the income twice,” said Eric Toder, a co-director of the nonpartisan Tax Policy Center who held a number of senior-level positions in government, including director of research at the IRS from 2001 to 2004.

Christie, the Republican governor of New Jersey and a likely presidential candidate, supports changing the nation’s corporate tax system. He advocates switching to a territorial system, which would tax only income earned in the U.S.

In advocating for the change, however, Christie has distorted the facts about the nation’s current tax system.

The U.S. has what is known as a “worldwide approach,” which as explained by the Congressional Budget Office, taxes all income “regardless of where that income is earned” and typically provides a foreign tax credit “to avoid taxing income twice.”

The IRS does provide a foreign tax credit, but Christie made no reference to it when discussing his plans to overhaul corporate taxes during question-and-answer sessions June 9 at St. Anselm College in Manchester, New Hampshire, and the next day at the Latino Coalition Small Business Summit in Washington, D.C. (His remarks, oddly enough, come at the 31:38 mark in both videos of his appearances in New Hampshire and Washington.)

Christie, June 9: We have the highest corporate tax rate in the world at 35 percent. And we’re one of the few countries in the world, including North Korea, that taxes that money twice. We tax an American company that makes money overseas in that foreign country and then if they want to bring it back to home we tax them again at 35 percent.

Christie, June 10: Our corporate tax rate is the highest in the world — it’s 35 percent. We need to lower that to 25 percent. … But we also have $2 trillion of profits from American companies earned overseas that don’t come back home. Why don’t they come back home? Because unlike most nations in the world, America, North Korea and a few others tax that twice. They don’t recognize the tax you paid to a foreign country. And then they want you to come back here and pay 35 percent again after you paid taxes overseas.

He made a similar statement last month during an economic speech in New Hampshire (at the 29 minute mark).

Christie, May 12: This is the way it works: If income generated abroad is brought back to America to create jobs, we tax it at a rate of 35 percent — after they’ve already been taxed in the first place in the country where they made the money.

Christie is right that the U.S. is “one of the few countries in the world,” as he said, that taxes foreign earnings. A Tax Policy Center report issued earlier this year said: “All but seven OECD countries (Chile, Ireland, Israel, Mexico, Poland, South Korea, and the United States) have adopted systems that exempt most or all active earnings from foreign business activities from home-country corporate taxation.”

But he is wrong to say foreign-earned income is being taxed twice and U.S. tax officials “don’t recognize the tax you paid to a foreign country.”

As the Tax Policy Center report says, “[T]he United States allows corporations to claim credits for income taxes paid to foreign governments directly or by foreign subsidiaries on distributed earnings. These foreign tax credits can be used to offset US tax liability on foreign-source income.”

The foreign tax credit is subtracted from taxes that would otherwise be owed, on line 5a of the corporate tax return form 1120. IRS instructions define taxes eligible for a credit as those “paid or accrued during the tax year to any foreign country or U.S. possession.”

Toder, a coauthor of the Tax Policy Center report, told us in an email that “this results in their paying tax at the US rate, not double taxation.”

“Gov. Christie is wrong to say that we tax the income twice,” Toder wrote to us. “The U.S. does tax income that its MNCs [multinational corporations] repatriated to the U.S. and some of that income has paid tax in foreign countries. But we allow companies to claim a credit for foreign taxes paid, so the income is not subject to double taxation.”

Donald Rousslang, who was a career tax analyst at the U.S. Treasury under both Presidents Clinton and Bush from 1994 to 2004, echoed Toder’s explanation.

“The income is not really subjected to two independent tax rates — it is merely subject to the higher of the U.S. or foreign income tax rates, and any residual U.S. tax on foreign earnings usually is suspended as long as the earnings are kept abroad,” Rousslang told us.

Roussland added, “Governor Christie appears to be confused about what people are usually talking about when they say that corporate earnings are subject to ‘double taxation.’ The term is usually used to refer to the fact that corporate earnings are taxed at the corporate level and then at the individual level when the earnings (after corporate tax) are paid out as dividends to shareholders.”

One last thing about the U.S. corporate tax. Christie says the U.S. has the highest rate in the world, and the nonpartisan Congressional Research Service agrees the U.S. has the “world’s highest statutory corporate tax rate” at 35 percent. But it’s important to know that he is talking about the statutory rate, which he doesn’t mention.

CRS says that the effective corporate tax rate in the U.S. — which is the rate corporations actually pay after claiming deductions, exemptions, deferrals and tax credits provided by the U.S. tax code — is similar to the effective tax rate in 33 other major countries in the Organisation for Economic Co-operation and Development.

CRS, Dec. 1, 2014: A particular aspect of the corporate tax system that receives substantial attention is the 35% statutory corporate tax rate. Although the United States has the world’s highest statutory corporate tax rate, the U.S. effective corporate tax rate is similar to the Organization for Economic Cooperation and Development (OECD) average. Further, the United States collects less in corporate tax revenue relative to Gross Domestic Production (GDP) (2.3% in 2011) than the average of other OECD countries (3.0% in 2011).

We take no position on the corporate tax system and whether it needs to change. But voters should know that U.S. multinational corporations receive a credit for taxes paid to foreign countries, and they do not on average pay the 35 percent statutory rate.

— Eugene Kiely