International Tax Neutrality: Revisited

Posted: 27 May 2013

See all articles by Fadi Shaheen

Fadi Shaheen

Rutgers, The State University of New Jersey - School of Law, Newark

Date Written: 2011


Viewing the development of the standard international tax neutrality discussion as being historically fairly limited because Musgrave’s conclusions, rather than basic definitions, served as the undisputed baseline, in a previous article I reconsidered the classic international tax neutrality theories and challenged their conclusions. I argued that residence-based taxation has no advantages over source-based taxation in achieving capital export neutrality (CEN), and introduced the idea of how all international tax neutrality benchmarks can be simultaneously achieved by source-based taxation without the need for harmonized tax rates. Building on that article, Michael Knoll argued that the inconsistent meanings given to capital import neutrality (CIN) in the literature caused much confusion, that Musgrave’s view of CIN is best interpreted as ownership neutrality, and that interpreting CIN largely as I did, it is residence-based taxation that can simultaneously achieve both CEN and CIN. Agreeing with Knoll about the confusion associated with CIN, this article disagrees with viewing CIN as ownership neutrality, questions the benefits of such a view and shows that it is not necessarily true, but only under the classic analysis, that source-based taxation would always satisfy ownership neutrality. The article then replies to Knoll’s response to the arguments in my previous article, and based on three recent empirical studies on the “direct effect” of corporate taxation on capital, further develops and expands the applicability of the argument of my previous article that source-based taxation can satisfy CEN simultaneously with all other neutrality benchmarks without tax rate harmonization.

[NOTE: A footnote to the first sentence of the first complete paragraph on page 146 was mistakenly struck due to the author’s typo. The footnote would cite to Wiji Arulampalam, Michael P. Devereux, and Giorgia Maffini, The Direct Incidence of Corporate Income Tax on Wages, Oxford University Center for Business (May 2008) and IZA Discussion Paper No 5293 (October 2010); Nilis aus dem Moore, Tanja Karsten and Christoph M. Schmidt, Do Wages Rise When Corporate Rates Fall? Difference-in-Differences Analyses of the German Business Tax Reform 2000 (February 2009); R. Alison Felix and James R. Hines Jr., Corporate Taxes and Union Wages in the United States, NBER Working Paper No. 16263 (August 2009).]

Keywords: International tax, tax policy, efficiency, capital export neutrality (CEN), capital import neutrality (CIN), national neutrality (NN), capital ownership neutrality (CON), national ownership neutrality (NON), source-based taxation, residence-based taxation, territorial, worldwide

JEL Classification: D92, E62, F39, G15, H20, H21, H22, H25, H32, H87, K33, K34

Suggested Citation

Shaheen, Fadi, International Tax Neutrality: Revisited (2011). Tax Law Review, Vol. 64, p. 131 (2011), Available at SSRN:

Fadi Shaheen (Contact Author)

Rutgers, The State University of New Jersey - School of Law, Newark ( email )

Newark, NJ
United States

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