Tax Havens: An Innocent Way to Avoid Double Taxation?

By Conor Clarke

I'm not sure there are two words that can summon the specter of government oppression quite like "double taxation." If the government gets to double dip in your wallet, what won't it do? And for exactly this reason those words being deployed against the administration's plan to close various loopholes on the taxation of foreign business income. A small problem with this strategy is that it turns out not to be true.



But that hurdle is easy to clear. Writes Daniel Mitchell:

The U.S. is one of the few nations in the world to impose worldwide taxation. This means that American companies are taxed not only on the income they earn in the U.S., but also on income they earn in other countries. That is a problem since any money earned abroad by American companies already is subject to all applicable taxes in those other countries. That's not too surprising. After all, the IRS taxes foreign companies that earn money in America.

Yet if two countries tax the same income, that is an unambiguous form of double-taxation. Even the politicians in Washington realize that two layers of tax would cripple American companies trying to earn market share abroad. As such, American companies with foreign income are allowed a credit for corporate income taxes paid to foreign governments.

Look, this is nothing more than rhetorical posturing. The foreign tax credit that Mitchell mentions is the reason why there's no double taxation. The full credit should work on a dollar-for-dollar basis. If you are paying a 15% rate in one country and repatriate the profits, you do not pay an additional 35%. You get a full credit for the 15%, and pay the difference.

There is a problem with the current tax system: The problem is that the US rate -- 35% -- is too high. But, to be somewhat cranky about it, I wish everyone would spend less time tossing around canard about double taxation and writing articles called "In Defense of Tax Havens," and more time focusing on the actual problem, which is the high rate.
  

This article available online at:

http://www.theatlantic.com/politics/archive/2009/05/tax-havens-an-innocent-way-to-avoid-double-taxation/17174/