Currently, U.S. companies can avoid paying taxes on foreign profits until they bring the money back home. So a U.S. company doing business in Ireland, for example, must pay the Irish tax of 12.5 percent, like every other company doing business in Ireland. But the U.S. firm would owe an additional 22.5 percent to the U.S. Treasury (the difference between Ireland's tax rate and the 35 percent U.S. tax rate) unless it reinvests the money overseas.

The United States is the last major economic power to tax the profits of locally headquartered companies if that income is earned abroad. Other nations, including most recently Japan and Britain, are moving to a territorial system that taxes only corporate profits earned within their borders.

Instead of following that trend, Obama proposes to move in the opposite direction. He argues that the current system gives tax breaks to U.S. multinationals at the expense of companies that operate solely on American soil. In 2004, the most recent year for which statistics are available, U.S. multinationals paid an effective U.S. tax rate of just 2.3 percent on $700 billion in foreign profits, according to the administration. "It's a tax code that says you should pay lower taxes if you create a job in Bangalore, India, than if you create one in Buffalo, New York," the president said yesterday.