U.S. Taxation of International Income: Blueprint for Reform.

• Author: Heimert, A. Michael

This book examines the current system the United States uses to tax international income and recommends specific measures for reform. The need for reform is based upon two central propositions. First, current international tax rules are complicated and distortional. This has occurred because the contemporary system evolved piecemeal from tax laws dealing with domestic income. Second, by changing international tax laws the U.S. can improve its competitiveness. Hufbauer believes the U.S. is losing economic ground to Europe and Japan, and that tax policy can assist in reversing this trend. He suggests a tax system that encourages multinational firms to locate their headquarter activities (especially research and development), and the production and export of high-technology goods and services, in the U.S.

Chapter I of the book presents statistics for Hufbauer's contention that the U.S. is becoming less competitive and briefly introduces his specific recommendations for tax reform. The remainder of the book discusses his rationales for reforms in detail.

Chapters 2 and 3, and a good part of the Appendix, outline the current system of U.S. taxation of international income, its evolution, and its underlying equity concepts. While perhaps useful to the noneconomist, many economists will find the discussions on equity too simplistic. Razin and Slemrod [1], for example, gives a richer treatment of the subject matter.

In Chapter 4 Hufbauer appeals to capital export neutrality to justify his first suggested reform: that the U.S. should switch to residence-based taxation of portfolio income flows. This is perhaps his most convincing recommendation, for unlike many of his other reforms, efficiency concerns guide his argument.

In Chapter 5 Hufbauer explains why the U.S. should promote the domestic location of multinational headquarters activity. As a reviewer cautious of market intervention, Hufbauer's appeal leaves me unconvinced. For instance, he states:

... headquarter's activities are highly desirable: they provide interesting, well-paying professional and technical jobs. Moreover, headquarters services are an incubator of human capital, and human capital is highly mobile, so the spillover effects are potentially large: key employees acquire the knowledge to start new firms and energize old ones [p. 92].

Yet he gives no evidence to back up these assertions. He then continues:

In this context, it is striking that the world's most affluent metropolitan...