Journal Article

The Case Against Foreign Tax Credits

Daniel Shaviro

in Journal of Legal Analysis

Published on behalf of The John M. Olin Center for Law, Economics and Business at Harvard Law School with the support of the Considine Family Foundation

Volume 3, issue 1, pages 65-100
Published in print January 2011 | ISSN: 2161-7201
Published online January 2011 | e-ISSN: 1946-5319 | DOI: https://dx.doi.org/10.1093/jla/3.1.65
The Case Against Foreign Tax Credits

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In international tax policy debate, it is usually assumed that, if one chooses not to exempt residents' foreign source income, the preferred system would offer foreign tax credits. This assumption is mistaken, given the bad incentives created by the credits' marginal reimbursement rate (MRR) of 100 percent and the unpersuasiveness of common rationales for granting them, such as those based on aversion to “double taxation” or support for capital export neutrality. While taxing foreign source income at the full domestic rate with only deductions for foreign taxes would overtax outbound investment, at least in principal creditability is dominated by a burdenneutral shift to deductions plus a reduced tax rate for such income. And even if such a shift is unfeasible or unwise, the incentive problems resulting from a 100 percent MRR for foreign taxes paid may illuminate various more practical tax issues, such as the merits of (1) shifting to an exemption system, which features implicit deductibility, and (2) various proposed reforms, such as removing disincentives in subpart F for foreign tax planning by U.S. multinationals.

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Subjects: Jurisprudence and Philosophy of Law

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