US International Taxation in Comparison with Other Regulatory Regimes
UCLA School of Law
September 23, 2013
Virginia Tax Review, Vol. 33, No. 1
UCLA School of Law, Law-Econ Research Paper No. 13-20
This article proposes that U.S. international tax policy analysis must take into account non-tax regulation, which is generally disregarded in international tax policy analysis. Structural features of non-tax regulatory regimes will be shown to have significant implications for fundamental normative claims of the international tax policy literature.
The article begins with the insight that taxation and regulation are in some sense substitutes. In light of the substitutability of taxation and regulation, the article asks why U.S. international taxation diverges from U.S. international regulation, specifically why the United States imposes tax on worldwide income while non-tax regulations typically have limited extra-territorial effect. The article proposes that the policies underlying U.S. international income taxation provide a useful framework with which to analyze U.S. international regulatory regimes. Using such a framework, the article finds that the divergence between taxation and regulation in the international context can be explained by differences in the distribution of the benefits of taxation and regulation.
The article then demonstrates, by analyzing U.S. international regulatory regimes within the framework of international tax policy, how non-tax regulatory regimes have significant implications for international tax policy. Given the substitutability of, and the divergence between, taxation and non-tax regulatory regimes, the normative justification for imposing tax on worldwide income is weakened when the neutrality norms (such as capital export neutrality and capital import neutrality) that are commonly used to evaluate international taxation are used to evaluate regulation. Although worldwide taxation appears advisable when regulatory costs are not considered (because worldwide taxation supports capital export neutrality when non-tax factors are omitted from the analysis), a territorial system of taxation may instead be supported depending on the relative rates of regulatory costs. Furthermore, a new justification for the limitations on the foreign tax credit, that an unlimited foreign tax credit may incentivize the export of capital rather than support capital export neutrality (which an unlimited foreign tax credit is claimed to do), becomes apparent when regulation is taken into account. The analytical results are consistent with the general theory of the second best of welfare economics.
Number of Pages in PDF File: 40
Keywords: taxation, international taxation, taxation of capital income, capital export neutrality, regulation, international law, exterritorial application of law, law and economics, general theory of the second best
JEL Classification: K34, K33, K20, K00, H20, H21, H25
Date posted: October 1, 2013 ; Last revised: July 2, 2014
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