What principles should guide the taxation of international income?

This paper reviews economic principles for optimality of the taxation of international profit, from both a global and national perspective. It argues that for systems based on residence or source, nothing less than full harmonisation across countries can achieve global optimality. The conditions for national optimality are more difficult to identify, but are most likely to imply source-based taxation. However, source-based taxation requires an allocation of the profits of multinational companies to individual jurisdictions; this is not only very difficult in practice, but in some cases is without any conceptual foundation. To the extent that the international tax system cannot conform to basic economic principles, and is becoming increasingly infeasible, more fundamental reforms – such as a destination-based tax – require further examination