Some Perspectives from the United States on the Worldwide Taxation vs. Territorial Taxation Debate

Journal of the Australasian Tax Teachers Association, Vol. 3, No. 35, 2008

52 Pages Posted: 26 Jul 2009  

J. Clifton Fleming Jr.

Brigham Young University - J. Reuben Clark Law School

Robert J. Peroni

University of Texas at Austin - School of Law

Stephen E. Shay

Harvard Law School

Date Written: July 22, 2009

Abstract

The United States approach to taxing foreign-source income is a hybrid worldwide system in form. However, because of deferral of U.S. tax on foreign-source active business income, liberal cross crediting opportunities and other defects, the U.S. system can actually produce a better-than-exemption result in the form of a negative rate of U.S. tax on foreign-source income. Moreover, the current U.S. system involves more complexity than the typical hybrid exemption system without achieving a dramatically greater revenue yield.

These shortcomings of the U.S. system plus the movement of other developed countries towards hybrid exemption systems has led to serious suggestions that the United States should adopt a hybrid exemption system. Most observers agree that the present U.S. hybrid worldwide system is, indeed, unacceptable and requires major reform. Beyond that point of agreement a pair, however, of debates has emerged. Although these two debates are distinguishable and have quite different answers, there is an erroneous tendency to believe that the solution to the first also dictates the outcome of the second. We strongly disagree.

The first of these debates focuses on the question of whether a well-designed hybrid exemption system is superior to the present U.S. hybrid worldwide system. As explained below, we believe that a well-designed hybrid exemption system is preferable to the defective regime presently employed by the United States. This is a spurious and distracting discussion, however, because there is no need for the U.S. system to be so poorly designed. Therefore, it is inappropriate to use the highly compromised U.S. approach as the point of comparison in the argument over whether the United States should adopt a theoretically correct exemption regime.

The second debate is the appropriate controversy. It centers on whether a well-designed hybrid exemption system is superior to a well-designed worldwide system that would differ importantly from the seriously flawed hybrid regime currently being operated by the United States. We conclude that even a well-designed exemption regime is distortive, inefficient and unfair and that a properly constructed worldwide system is the preferable alternative.

Keywords: International taxation, income taxation, taxation federal

JEL Classification: F02, F21, F23, H21, H25, H87, K34

Suggested Citation

Fleming, J. Clifton and Peroni, Robert J. and Shay, Stephen E., Some Perspectives from the United States on the Worldwide Taxation vs. Territorial Taxation Debate (July 22, 2009). Journal of the Australasian Tax Teachers Association, Vol. 3, No. 35, 2008. Available at SSRN: https://ssrn.com/abstract=1437796

J. Clifton Fleming Jr. (Contact Author)

Brigham Young University - J. Reuben Clark Law School ( email )

430 JRCB
Brigham Young University
Provo, UT 84602
United States

Robert Joseph Peroni

University of Texas at Austin - School of Law ( email )

727 East Dean Keeton Street
Austin, TX 78705
United States

Stephen E. Shay

Harvard Law School ( email )

1563 Manssachusetts Avenue
Cambridge, MA 02138
United States

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