Designing a U.S. Exemption System for Foreign Income When the Treasury is Empty
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
Florida Tax Review, Vol. 13, No. 8, 2012
This article springs from two concurrent phenomena. First, U.S. federal deficit spending projections indicate that any feasible deficit reduction plan will require substantial additional revenue. Second, the U.S. system for taxing foreign-source income is so badly flawed that if the United States were to adopt a principled exemption or territorial system under which eligible foreign source income is taxed at a zero rate, the fisc would actually gain revenue with which to ease the deficit problem. To realize its revenue raising potential, however, an exemption system will require the following characteristics (or comparable analogues): 1) A robust subject-to-tax requirement (to foreclose use of low-tax foreign regimes) and continued current taxation of passive and mobile income under an updated Subpart F regime; 2) Disqualification from exemption for royalties (including deemed royalties from a foreign branch), interest, services payments and other foreign-source items that do not bear a significant foreign tax; 3) Elimination of the current tax exemption for 50 percent of the income from U.S. export sales; 4) Allocation of domestic expenses to foreign-source income to protect the U.S. tax base from “deduction dumping” in a more realistic way than an inadequate 5 percent “haircut” and 5) A prohibition against deducting foreign losses from U.S.-source income.
To the extent that an exemption system deviates from these five characteristics, it creates revenue transfers to a relatively small group of mostly prosperous U.S. multinational corporate taxpayers at a time when the Treasury is in distress. This ought not to be allowed unless the transfers can pass a rigorous cost/benefit test.
Number of Pages in PDF File: 70
Keywords: Income Taxation, International Taxation, Transnational Taxation, International Law, International Business
JEL Classification: E62, E63 ,H21, H25, H62, H87, K34
Date posted: January 10, 2013