Taxation of income is devilishly complicated in a globalizing world economy. Two or more jurisdictions may compete for the same income, even while defining income and tax-deductible expenses differently. And they may compete to acquire the income through tax incentives, as corporate activity and personal portfolios become increasingly mobile. The economist and lawyer Hufbauer and the lawyer Assa provide an admirable guide through the maze of U.S. corporate income taxation, including (mercifully in appendices) brief histories of how the United States got to where it is today. The authors find the current thicket of tax rules governing foreign-source income unsatisfactory, in part because of a lack of clear objectives. They propose shifting the taxation of active business income (but not passive, or portfolio, income) to a territorial basis -- that is, the Internal Revenue Service would tax only business income earned in the United States, not that earned globally, as it does now. This, the authors argue, would allow U.S. corporations to compete more effectively with foreign firms in locating production activities abroad while retaining high-value headquarters and research-and-development activities in the United States.
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