What's New?
Background Paper No. 12
Executive Summary
There has been little debate about international tax policy design since the 1986 Tax Reform Act, in stark contrast to the growing tensions between U.S. international tax policy and the increasingly international economy in which U.S. businesses compete. The debate on international tax policy has historically been couched in terms of two competing theories of tax neutrality. One of these theories, known as territoriality, seeks to prevent domestic tax considerations from diminishing or improving the competitiveness of any domestic taxpayer's foreign investments. Under territoriality, the taxpayer's home country forgoes taxing all foreign source income as long as the income is not afforded special tax treatment in the country in which the investment is made.
The alternative theory, known as capital export neutrality, seeks a domestic tax policy that eliminates tax considerations for investors choosing between domestic and foreign investment opportunities. The measures it suggests are simple: impose domestic tax on foreign source income and allow a tax credit in the amount of foreign taxes paid to be used against domestic tax liability from both foreign and domestic source income.
U.S. policy was founded on the theory of capital export neutrality, but in practice, however, current policy varies significantly from the theory. U.S. policy seeks to ensure that U.S. taxpayers' income from foreign investment is subject to at least as much tax (foreign and U .S.) as domestic investment .This policy is driven by a desire to prevent the U.S. tax code from creating a tax incentive for U.S. businesses to invest abroad. According to proponents of this policy, such an incentive would exist if U .S .citizens' foreign source income, which may be taxed more lightly abroad than it would be if it were earned and taxed in the United States, was exempt from tax at home. This concern is buttressed by the notion that it may be unfair to allow U.S. taxpayers to pay a lower rate of tax on foreign than on domestic income.
Current U.S. policy is not without its consequences. Unquestionably, imposing U.S. tax on foreign source income puts many U.S. businesses at a competitive disadvantage relative to foreign-based businesses .In some cases, this disadvantage can be substantial .For example, according to a recent Tax Foundation study a U .S .investment in Japan must be well over 15 percent more productive than a similar domestic Japanese investment to overcome the extra burden imposed by U.S. taxes.
This paper argues that current U.S. tax policy ultimately aims to preserve the U.S. as a place to invest by creating a tax disincentive to foreign investment. This policy bears a striking resemblance to tariff and non-tariff barriers, such as voluntary restraint agreements, which are designed to shield U.S. markets from foreign competition. While trade protectionism is designed to preserve domestic investment and jobs in the face of foreign competition, investment protectionism is designed to preserve domestic investment in the face of more competitive foreign opportunities.
Since 1957, Tax Features has been the Tax Foundations official bimonthly policy review. Tax Features presents in-depth, semi-technical articles on topical issues in tax policy. Topics covered include: state business tax climates, state tax collections and rates, the effects of tax cuts on individuals and businesses, Tax Freedom Day and more. Tax Features is distributed to thousands of journalists, members of congressional tax writing committees, executive branch agencies, corporate tax managers, state tax officials, university libraries, tax-related nonprofits and academics.
Free hard-copy subscriptions to Tax Features are available to Tax Foundation membersclick here to join today. Sample issues available upon request: email hansen@taxfoundation.org.
www.taxfoundation.org/donate/
Special Report No. 42
Executive Summary
Newly released income tax data shows that the top one percent of income earners now pay more than one quarter of all federal individual income taxes. This striking fact is available in tax return statistics for 1992 from the Internal Revenue Service. These statistics are examined in this report to provide an overview of the distribution of federal income tax payments.
Since 1957, Tax Features has been the Tax Foundations official bimonthly policy review. Tax Features presents in-depth, semi-technical articles on topical issues in tax policy. Topics covered include: state business tax climates, state tax collections and rates, the effects of tax cuts on individuals and businesses, Tax Freedom Day and more. Tax Features is distributed to thousands of journalists, members of congressional tax writing committees, executive branch agencies, corporate tax managers, state tax officials, university libraries, tax-related nonprofits and academics.
Free hard-copy subscriptions to Tax Features are available to Tax Foundation membersclick here to join today. Sample issues available upon request: email hansen@taxfoundation.org.
www.taxfoundation.org/donate/
Special Report No. 41
Executive Summary
The Internal Revenue Act of 1954 was landmark legislation that, for the first time, placed the income tax at the core of the federal tax system. In the 40 years since the passage of that Act, 31 significant federal tax enactments have taken place. On average, that amounts to a substantial amendment to the federal tax code every 1.3 years. Such instability in the tax code creates economic uncertainty among taxpayers, which, in turn, generates economic costs.
Special Report No. 40
Executive Summary
By the end of 1993, federal, state, and local governments in the United States owed $4.4 trillion in credit market debt, an average of $16,835 for each American. This total means that governments are the largest borrowers in the countryahead of households, which borrow for home mortgages and other uses and ahead of corporate and non-corporate businesses, which borrow to finance investments in buildings, machines, and other items. Of the total, the federal government owes $3 .3 trillion while state and local governments owe $1.1 trillion.
At the federal level, debt has been rising quickly as each annual deficit adds to the total accumulated national debt. Any notion of ever paying off the debt seems distant as the federal budget has not been balanced since 1969an unprecedented 26-year string of budget short-falls. The second worst string of unbalanced budgets in U .S. history occurred during the Great Depression and World War II when 16 budgets in a row went unbalanced.
While overshadowed by concern about the national debt, state and local government debt has been piling up quickly since the early 1980s as well. Factors contributing to rising state and local debt levels are discussed starting on page 4.
