Bring U.S. tax law into the 1990s.

• Author: Mattson, Robert N.

The U.S. tax law for operations outside the U.S. is outdated. The law is structured on a set of fundamentals that came out of the mid-1960s, when the U.S. was the largest supplier to the world's capital markets. But today, the U.S. is the world's largest debtor. U.S. investment abroad has grown nine times since the mid-'60s, but foreign direct investment in the United States has grown 40 times. Our exports 25 years ago doubled our imports. Now we have the largest deficit in balance of trade in the world. You might think that deficit results from oil imports. it doesn't. The percentage of oil imports relative to total imports has stayed absolutely the same through that entire period.

International trade was a small part of our total GNP back in the 60s. We almost ignored the foreign aspects of business and the tax law. U.S. multinationals had more than 70 percent of their entire business in the United States. But today, U.S. corporations conduct more than 50 percent of their business outside the U.S. IBM, for example, has almost two-thirds of its business outside the U.S, In the 1960s, 18 of the world's top 20 industrial corporations were American companies. Today, only nine are American.

That's the bad news. The good news is that most economists say that we have a very good chance of returning to outward investment at a greater pace than inward investment by the end of the decade. But our tax law, unless it is amended to take into account the reality of international business today, will make it difficult for U.S. business to achieve that objective.

One of the major problems is that the U.S. taxes a business on its worldwide income. But many other countries consider their foreign business earnings to be exempt. in these countries, if foreign business is taxed at all, it's taxed at the source. When income is returned to the home countries, it is considered an increment of wealth to the home country and is not taxed again. Yes, the U.S. does have a foreign tax credit system. But over the last five to six years, that system has not only been made very complex, but has in fact been shattered. Now, a U.S. company's book effective tax rate is often higher than that of other multinationals based in other countries because of U.S. tax rules on foreign-source income.

Europe has gone in a different direction. As Europe reaches 1992, the EC has removed numerous tax barriers. It will allow tax-free mergers between Belgium and Britain, for example...