The Grand Illusion: A Neutral System for the Taxation of International Transactions

The portion of the Internal Revenue Code detailing the taxation of income from international transactions has been the subject of many recent reforms, but these reforms are no more likely to correct the tax system's bias in favor of foreign investment than previous reforms. The situation may even worsen because the reforms are not directed at the structure of the tax credit mechanism. The tax system's bias is protected and exacerbated by other countries that it benefits. The system can strive to achieve "defensive neutrality" by eliminating 2 factors: 1. linkage between investments in high- and low-tax jurisdictions, and 2. the disincentive for the repatriation of dividends that results from imposing either a catch-up federal tax or 2nd-tier foreign tax. The question that must be faced by politicians and policymakers is whether neutrality should be a goal of the US' international tax rules.