Why does the tax on income from foreign operations matter?

Foreign operations of U.S. companies support a variety of jobs in the United States, from R&D to manufacturing to operational and support jobs. When U.S. companies succeed in foreign markets, their success increases demand for the goods and services they produce at home.

In 2018, U.S. exports of manufactured products and other goods by U.S. multinational companies to their foreign affiliates and unrelated foreign customers totaled $834 billion. U.S. companies often use foreign affiliates to do some manufacturing or assembly of products that are too costly or large to transport over long distances, or that must ultimately be installed at customer sites in foreign jurisdictions, but which rely on U.S. exported components.

Foreign affiliates will also service U.S.-manufactured goods at the site of the foreign customer. For example, American-made aircraft engines power airlines around the world but are serviced close to the foreign customers’ location to avoid delays in returning to operation. Those services in turn support greater exports. Increased sales of American products in foreign markets also support greater R&D spending in the U.S. — spending that results in many high-paying U.S. jobs in research and development.

A study by researchers at Harvard Business School and the University of Michigan confirms that when American companies succeed in foreign countries, they hire more people at home, pay higher wages to U.S. workers and invest more in the United States.

Not surprisingly, higher U.S. taxes on the foreign income of American companies make them less competitive in foreign markets, reduce their sales abroad and their employment and investment at home.