11 May 2009

Elegant International Tax Reform

A good deal of the press coverage of the Obama administration's proposed international taxation reforms suggests that they are little more than a crude tax grab that tries to get revenue from transactions that other developed countries don't even bother to tax.

A May 6 posting by tax professor and tax blogger James Edward Maule (which I didn't have time to blog when I first read it), however, suggests that the international tax proposals involve more good tax policy and conceptual elegance than general press coverage of the proposals would suggest. Sometimes long winded Maule manages to sum up this major international taxation reform package in just a few words (references to non-international tax law proposals omitted):

The changes would require companies that defer taxation of foreign income to also defer deductions, would preclude the foreign tax credit . . . for foreign taxes paid on income not taxed by the U.S., would prohibit companies from treating certain foreign subsidiaries as disregarded entities for tax purposes . . . and . . . would require U.S taxpayers who transmit money to banks that do not cooperate with the U.S. Treasury to rebut the presumption that they were engaging in tax fraud. . . .

What is the sense of permitting taxpayers to defer taxation on foreign income while claiming current deductions for foreign expenses? Taxpayers who want to claim deductions in the current year should also report and pay tax on the income. Taxpayers who want to defer the income should defer the deductions. Not only does this make sense, it is fair.

What is the sense of permitting a foreign tax credit with respect to income on which U.S. income tax has not been paid? Is not the purpose of the foreign tax credit to reduce or eliminate double taxation of the same income by both the U.S. and a foreign nation? Where is the double taxation if there is no U.S. taxation of the income?

What is wrong with shifting the burden of proving the lack of tax fraud to individuals and companies that stash money in banks that advertise their willingness to thwart tax collectors? Should people who do business with enablers of tax fraud be blessed with a presumption of good intentions such that the IRS should have the burden of showing the fraudulent purpose? There are plenty of places to invest money that aren't trying to hide from the IRS. People who choose to do business with the tax evasion specialists ought not be complaining.

International tax is rocket science. Indeed, it is quite a bit more difficult. My fourth grader studies rocket science at school, while just starting to study how to calculate domestic sales taxes (let alone international tax law). But, these reforms are a model of simplicity for the field, and this gives them considerable political power, if this message can get through to political opinion makers.

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