Fairness in International Taxation: The Ability-to-Pay Case for Taxing Worldwide Income

Abstract

Copyright © 2001 by J. Clifton Fleming, Jr., Robert J. Peroni & Stephen E. Shay. All rights reserved.

The ability-to-pay fairness concept is a key factor underlying the historic U.S. policy of relying principally on the income tax to finance federal government expenditures. Indeed a major justification for this reliance, as opposed to significant dependence on consumption levies, is that the income tax is a system for spreading the costs of government in a way that advances fairness by giving substantial deference to comparative ability-to-pay.
Consequently, one would expect tax policy analysts to routinely examine the equity implications of international income tax rules by applying the fairness criterion with the same rigor as in the domestic context. But surprisingly, there has been relatively little discussion in the literature regarding the role of the ability-to-pay concept in analyzing international tax policy issues. This may be because the composition of international investment historically has been dominated by the direct foreign investments of multinational corporations, which pose perplexing issues in evaluating fairness concerns. Even if true, however, this is an inadequate reason to forego analysis of fairness considerations when scrutinizing the important international dimension of a modern income tax. In this article, we examine the role that fairness concerns, embedded in the abilityto-pay concept, play in justifying the U.S. policy of taxing U.S. residents on their worldwide incomes.