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Evaluating International Tax Reform

Mihir A. Desai

Harvard Business School - Finance Unit; National Bureau of Economic Research (NBER)

James R. Hines Jr.

University of Michigan; NBER

July 2003

Harvard NOM Working Paper No. 03-48

This paper introduces "capital ownership neutrality" (CON) and "national ownership neutrality" (NON) as benchmarks for evaluating the desirability of international tax reforms, and applies them to analyze recent U.S. tax reform proposals. Tax systems satisfy CON if they do not distort the ownership of capital assets, which promotes global efficiency whenever the productivity of an investment differs based on its ownership. A regime in which all countries exempt foreign income from taxation satisfies CON, as does a regime in which all countries tax foreign income while providing foreign tax credits. Tax systems satisfy NON if they promote the profitability of domestic firms, and therefore home country welfare, by exempting foreign income from taxation. Standard normative benchmarks of capital export neutrality, national neutrality, and capital import neutrality carry very different implications, since they fail to account for the productivity effects of tax-induced changes in capital ownership. Proposed U.S. tax reforms that reduce the taxation of foreign income, thereby bringing the U.S. tax system more in line with the systems of other countries, have the potential to advance both American interests and global welfare.

Number of Pages in PDF File: 25

Keywords: FDI, Multinational, International, Welfare

JEL Classification: H87, H21, F23

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Date posted: July 20, 2003  

Suggested Citation

Desai, Mihir A. and Hines Jr., James R., Evaluating International Tax Reform (July 2003). Harvard NOM Working Paper No. 03-48. Available at SSRN: http://ssrn.com/abstract=425943 or http://dx.doi.org/10.2139/ssrn.425943

Contact Information

Mihir A. Desai (Contact Author)
National Bureau of Economic Research (NBER)
1050 Massachusetts Avenue
Cambridge, MA 02138
United States
Harvard Business School - Finance Unit ( email )
Boston, MA 02163
United States
617-495-6693 (Phone)
617-496-6592 (Fax)
James Rodger Hines
University of Michigan ( email )
625 South State Street
Ann Arbor, MI 48109-1215
United States
1050 Massachusetts Avenue
Cambridge, MA 02138
United States
Feedback to SSRN

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