Comment on Desai and Hines, "Old Rules and New Realities: Corporate Tax Policy in a Global Setting" (Response to Mihir A. Desai and James R. Hines Jr., National Tax Journal, Vol. 57, P. 937, December 2004‪)‬

INTRODUCTION In the December 2004 issue of the National Tax Journal, Desai and Hines claim that the current U.S. tax burden on foreign income is in the neighborhood of $50 billion a year." This is, of course, in addition to the foreign host country tax burden, which can be credited against the initial tentative U.S. tax on the income. This alleged $50 billion loss in profits to U.S. corporations resulting from the U.S. tax system is made up of three related components. The first is the estimated $20 billion of U.S. tax collected in 1999 on all corporate income now defined as foreign source under the U.S. tax rules. Based on this initial $20 billion, they conclude that a further $10 billion should be attributed to the effect of the taxes owed on unrepatriated earnings. The final $20 billion is the additional after-tax profits U.S. companies would have been able to earn if all foreign income were totally exempt. U.S. firms would expand investment abroad and have a greater incentive to avoid foreign taxes. Desai and Hines suggest that these large 'efficiency' gains justify complete exemption of all foreign income. They also justify the exemption of all foreign income on the basis of their concept of 'ownership neutrality' among competing buyers of foreign assets that they introduce at the end of the paper.