In Response to the Article 'Worse than Exemption'

Abstract

In recent years there has been wide debate among scholars about the deferral approach of the US tax system. The dispute is mainly focused on the right set of rules that should be adopted when taxing foreign income generated by US-based multinational enterprises (hereinafter MNEs) from their foreign-controlled subsidiaries. Recently, the scholars J. Clifton Fleming, Robert J. Peroni and Stephen E. Shay suggested in their article WORSE THAN EXEMPTION that the current American tax system is worse for the US public treasury than an exemption tax system would be, since it in effect creates tax advantages that keep the US public treasury in a deficit until the MNEs repatriate their foreign profits. This paper will review the foregoing article and will argue that the reason for the disadvantages is the non-competitive corporate income tax (hereinafter CIT) rates prevailing in the US, combined with a misguided tax treatment of US-based MNEs when repatriating their profits from overseas. Finally, this article presents the solution formulated by President Barak Obama in “The President’s Framework for Business Tax Reform,” which proposes to replace the current treatment of overseas-generated profits of US based MNEs.