The Case against Deferral: A Deferential Reconsideration

Abstract

The ability to defer home country taxation of foreign income is widely criticized as encouraging excessive foreign investment. This criticism is based on a model in which the function of deferral is to reallocate a fixed supply of capital between foreign and domestic uses. In realistic situations, however, deferral enhances the value to home countries of inframarginal foreign investment, taxation raises the value of marginal foreign investment, and the trade-off between foreign and domestic investment need not be onefor-one. Together, these considerations imply that deferring home taxation of foreign income can enhance economic efficiency.

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