Deferral and the Optimal Taxation of International Investment Income

In recent years U.S. companies have been able to use new tax planning strategies to reduce the foreign taxes they pay on their foreign earnings. Since the companies usually can defer the residual U.S. tax on these earnings, one effect of the reduction in foreign taxes is to increase a preexisting tax bias in favor of foreign over domestic investment. This paper reviews the economics literature to see whether the preexisting tax bias is likely to promote global welfare. It provides only a first step in examining the welfare consequences of the new tax planning strategies, however, since the strategies do not necessarily affect all foreign tax rates uniformly