The David R. Tillinghast Lecture: Taxing International Income: Inadequate Principles, Outdated Concepts, and Unsatisfactory Policies

It is a pleasure to be here today to deliver the first David R. Tillinghast Lecture of the 21st century, a lecture honoring a man who has done much to shape and stimulate our thinking about the international tax world of the 20th. Our nation\u27s system for taxing international income today is largely a creature of the period 1918-1928, a time when the income tax was itself in childhood. From the inception of the income tax (1913 for individuals, 1909 for corporations) until 1918, foreign taxes were deducted like any other business expense. In 1918, the foreign tax credit (FTC) was enacted. This unilateral decision by the United States to allow taxes paid abroad to reduce U.S. tax liability dollar for dollar – taken principally to redress the unfairness of double taxation of foreign source income – was extraordinarily generous to those nations where U.S. companies earned income. In contrast, Britain, also a large capital exporter, until the 1940\u27s credited only foreign taxes paid within the British Empire and limited its credit to a maximum of one-half the British taxes on the foreign income. In 1921, Congress limited the foreign tax credit to ensure that a taxpayer\u27s total foreign tax credits could not exceed the amount of U.S. tax liability on the taxpayer\u27s foreign source income. This limitation was enacted to prevent taxes from countries with higher rates from reducing U.S. tax liability on U.S. source income