Rethinking Foreign Tax Creditability

Abstract:     
International tax policy experts often mistakenly conflate two distinct margins: (1) the overall tax burden on outbound investment, and (2) the marginal reimbursement rate (MRR) for foreign taxes paid, which is 100 percent under a foreign tax credit system, but equals the marginal tax rate for foreign source income under an explicit or implicit deductibility system (such as exemption). From a unilateral national welfare standpoint, whatever the right answer at margin (1), deductibility is clearly optimal, and creditability dangerously over-generous, at margin (2).

Number of Pages in PDF File: 22

Keywords: international taxation, foreign tax credits, double taxation

JEL Classification: H20, H21, H25, H73

working papers series