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Designing a U.S. Exemption System for Foreign Income When the Treasury is Empty

70 Pages Posted: 10 Jan 2013  

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: 2012

Abstract

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.

Keywords: Income Taxation, International Taxation, Transnational Taxation, International Law, International Business

JEL Classification: E62, E63 ,H21, H25, H62, H87, K34

Suggested Citation

Fleming, J. Clifton and Peroni, Robert J. and Shay, Stephen E., Designing a U.S. Exemption System for Foreign Income When the Treasury is Empty (2012). Florida Tax Review, Vol. 13, No. 8, 2012. Available at SSRN: https://ssrn.com/abstract=2194230

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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