Reply to Becker and Fuest

It is an understatement to say that the appropriate taxation of foreign business income is a controversial and potentially confusing topic. One of the mysteries of international taxation has been that the prescriptions of what, until recently, was the accepted academic wisdom differs so sharply from widespread international practice. In an important contribution, Richman (1963) noted that a home government confronted with the choice of where it would prefer one of its resident taxpayers to allocate a single unit of capital would weigh the after-foreign-tax return from investing abroad against the pre-tax return from investing at home. From this observation, she concluded that countries maximize their own welfare by subjecting foreign income to full current domestic taxation, permitting only a deduction for foreign tax payments. This analysis further implies that a policy of taxing foreign income while granting credits for foreign income tax payments maximizes world welfare