Copyright (c) 2007 University of Florida
Florida Tax Review
ARTICLE: Territorial vs Worldwide International Tax Systems: Which is Better for the U.S.?
8 Fla. Tax Rev. 283
by Paul R. McDaniel*
The Report of the President's Advisory Panel on Federal Tax Reform, entitled "Simple, Fair, and Pro-Growth: Proposals to Fix America's Tax System," was released in November 2005. 1 One of the issues addressed in the Panel Report was whether the U.S. should shift from its current international tax system (taxing the worldwide income of its nationals with a credit for foreign income taxes) to a territorial system (exemption of foreign branch business income and dividends from foreign subsidiaries out of business income). The Panel opted for the territorial system. The report devoted only about twelve pages to the subject, but its recommendation has reignited interest in a subject which has recurred with some regularity over the past decade. 2
In this paper, I explore whether the proposal of the Panel would represent a beneficial tax policy change for the U.S. In so doing, the territoriality recommendation and what I will term a "model" worldwide taxation of income coupled with a foreign tax credit (WWI/FTC) system will be examined from the perspectives of efficiency, equity, and simplicity. 3 Part I of the paper describes the Panel's proposal and the arguments it advanced in favor of the proposed change. Part II sets forth a model by which the Panel proposal will be evaluated. Part III compares the simplicity arguments for each of the two international tax regimes. In Part IV, the efficiency arguments advanced for each system are considered. Part V analyzes the equity issues under each ...
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