Accounting/Finance Alternative Approach to Taxes Research Paper

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The common guiding principles of economics provide little direction. As a consequence, U.S. international tax policy is a clutter of rules with a diversity of political and economic reasons. It is frequently described as a concession that strikes a balance. Policy leans toward tightening foreign tax rules and putting foreign income on equal footing with U.S. income when it is thought that foreign investment hurts the U.S. economy. Then policy leans toward relaxing the rules and giving foreign income favorable treatment if it is thought that foreign investment promotes U.S. interests (Sullivan, n.d.).

Due to the fact tat every government charges taxes by its own process and at its own rates, the ensuing system of international taxation often warps investment and adds to reductions in international economic well-being. The environment of these alterations depends on the way of taxing profits from international investment. If investment earnings are taxed only at the source, substantial amounts of capital could be diverted to jurisdictions with the lowest tax rates as an alternative o flowing to investment development with the highest pre-tax rate of return. If a classification of residence taxation is the universal norm, businesses residing in low-tax nations might be able to draw more investment capital or possibly augment their market share by way of lower prices to the loss of businesses residing in high-tax jurisdictions. In either circumstance, capital is sidetracked from its more prolific uses, and international income and effectiveness suffer (Overview of Present-Law Rules and Economic Issues in International Taxation, 1999)

The most basic solution to this dilemma is equalization of effective tax rates, but this may not be a sensible answer given the differences in national preferences for the quantity and method of taxation.

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"There is no consensus on what method of taxing international investment income minimizes distortions in the allocation of capital when nations tax income at different effective rates, but the alternatives of capital export neutrality and capital import neutrality are the most cited guiding principles. These two standards are each striking goals of international tax policy. The problem is that, with unequal tax rates, these two goals are not mutually attainable" (Overview of Present-Law Rules and Economic Issues in International Taxation, 1999)

Overall the current tax laws, both domestically and internationally hurt the U.S. economy. Domestically the current laws make it so that those people who make income in foreign lands often do not have to pay any income tax on that money here in the U.S. On an international basis the current tax laws make it so that countries with lower tax rates can often entice businesses to set up shop there instead of in other places where they might be more successful. There needs to be uniformity on both levels in order to make the economy stronger going forward.

References

Ault, H.J. & Bradford, D.F. (1990). Taxing International Income: An Analysis of the U.S.

System and Its Economic Premises. Retrieved from http://www.nber.org/chapters/c7203.pdf

Foreign Tax Credit. (n.d.). Retrieved from http://www.irs.gov/irm/part4/irm_04-061-010.html

Overview of Present-Law Rules and Economic Issues in International Taxation. (1999)

Retrieved from http://www.jct.gov/jct_html/x-13-99.htm

Sullivan, M.A. (n.d.). A Challenge to Conventional International Tax Wisdom. Retrieved http://www.tax.com/taxcom/features.nsf/Articles/D5817DA1C18C1341852576BD00

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