This paper explores how the tax design called the X tax could alleviate the complexities and avoidance opportunities plaguing the existing U.S. system for taxing international business income. In addition to laying out the general efficiency, equity and administrative characteristics of an X tax, the paper considers, in particular, the fundamental choice between two treatments of transborder business transactions – the origin and destination principles. The destination-principle approach sidesteps the need to identify arm’s length terms of transborder transactions between related business entities – the transfer-pricing problem. This problem remains in the origin-principle approach, which, however, presents fewer challenges of monitoring the flow of goods and services across borders, obviates what I call the “tourism problem” whereby people can reduce their taxes by consuming in a low-tax jurisdiction and, arguably most important, avoids transition effects associated with introduction of the tax and subsequent tax rate changes that occur in the destination approach. To obtain the advantages without the principal disadvantage, I suggest special rules for transborder transactions between related parties that would eliminate the transfer-pricing problem in an origin-based system.
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Paper provided by Princeton University, Department of Economics, Center for Economic Policy Studies. in its series Working Papers with number
109.
Find related papers by JEL classification: H20 - Public Economics - - Taxation, Subsidies, and Revenue - - - General H25 - Public Economics - - Taxation, Subsidies, and Revenue - - - Business Taxes and Subsidies H87 - Public Economics - - Miscellaneous Issues - - - International Fiscal Issues; International Public Goods
References listed on IDEAS Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
Alan J. Auerbach & David F. Bradford, 2001.
"Generalized Cash Flow Taxation,"
Working Papers
131, Princeton University, Department of Economics, Center for Economic Policy Studies..
[Downloadable!]
Gordon, Roger H. & Hines, James Jr, 2002.
"International taxation,"
Handbook of Public Economics,
in: A. J. Auerbach & M. Feldstein (ed.), Handbook of Public Economics, edition 1, volume 4, chapter 28, pages 1935-1995
Elsevier.
[Downloadable!] (restricted)
Other versions:
Roger H. Gordon & James R. Hines Jr., 2002.
"International Taxation,"
NBER Working Papers
8854, National Bureau of Economic Research, Inc.
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