Tax Exporting

Tax exporting refers to the practice of one jurisdiction imposing tax burdens on residents of another. This term can refer to taxes that cross any boundary, from town lines to international borders.

Tax exporting can take many forms and fulfill equally as many objectives. In some instances, the practice is simply a transfer of tax liabilities to out-of-state individuals who happen to engage in the economy of a given state and pay taxes at the same rate as local taxpayers. In other cases, a tax may be deliberately structured to impose a higher burden on outsiders than it does on locals. This could simply be a means of generating extra revenue for a local government or it could be designed to discourage a particular business or behavior. In other cases, a tax could be a political weapon aimed at another jurisdiction’s leadership.

On a federal level, any foreign national earning income from a U.S. source is expected to file a return and pay tax on that income. This tax may be reduced by a tax treaty between the U.S. and the foreigner’s country, and states may honor those treaties to varying degrees. A corporation based overseas will be subject to U.S. taxation if the Internal Revenue Service (IRS) determines that it earns regular and routine income from U.S. business, even if through an intermediary. The foreign firm will be taxed at the same graduated corporate rate as a U.S. firm, but a tax treaty can intervene to lower that rate in some cases.

The classic example of a tax exported for the purpose of imposing an economic or political burden on a foreign company or its government is a tariff. Tariffs are essentially targeted taxes that can be based on the value of a good moved across international borders or a fixed charge not tied to the trade value of an import. Some economists argue that tariffs are more of a burden on consumers than companies or governments, but governments continue to use them as punitive measures against one another.

In the late 18th century, the U.S. government first used tariffs as a means of revenue generation and protection of domestic industry against those of any foreign country. For much of the 19th century, tariffs were the principal source of income for the entire U.S. government and were not particularly targeted at any overseas firm or country. Revenue generation and protectionism continued to be the main foundations for these exported taxes. Following World Wars I and II tariff rates have declined significantly as governments have tended toward free global trade. A backlash against free trade has emerged in the early 21st century. Some economic and political leaders in the U.S. have argued that the U.S. is suffering from free trade agreements and have proposed tariffs as a means of retribution and forced renegotiation of those pacts.