A Burden-Neutral Shift from Foreign Tax Creditability to Deductibility?
Kimberly A. Clausing
Reed College - Department of Economics
New York University School of Law
October 27, 2010
Tax Law Review, Vol. 64, No. 4, 2011
NYU Law and Economics Research Paper No. 10-39
Observers of international tax rules have long conflated two distinct effects of the foreign tax credit on multinational firms: the effect on the incentive to invest abroad and the effect on foreign tax sensitivity. With national welfare as the policy objective, we discuss how a burden neutral shift from foreign tax credits to deductibility could be designed to improve distortions associated with insensitivity to foreign taxation without raising aggregate burdens on outward foreign investment. We also provide new evidence suggesting that the tax sensitivity of outward foreign direct investment is indeed reduced for OECD countries using foreign tax credits, in comparison with other OECD countries. Finally, we discuss policy considerations surrounding a possible burden-neutral shift from foreign tax creditability to deductibility.
Number of Pages in PDF File: 23
Keywords: International Taxation, Foreign Tax Credits
JEL Classification: H20, H21, H25, H73
Date posted: August 24, 2010 ; Last revised: October 9, 2011