US Taxation of Foreign Income

What this book actually teaches

US Taxation of Foreign Income by Gary Clyde Hufbauer and Ariel Assa, published in 2007 by the Peterson Institute for International Economics, is a policy-oriented analysis of how the United States taxes the overseas earnings of American corporations and individuals. Hufbauer, a senior fellow at Peterson and one of the most cited economists in international trade and tax policy, uses this book to make a sustained argument that the U.S. international tax system — built around worldwide taxation with a foreign tax credit — creates competitive distortions for American multinational companies and generates economic inefficiencies that undermine U.S. export competitiveness and foreign direct investment.

The book's central argument is that the U.S. worldwide tax system, which taxes American corporations on their global income regardless of where it is earned (subject to a credit for foreign taxes paid), puts U.S. multinationals at a systematic disadvantage relative to competitors from countries operating under territorial tax systems. Under territorial systems, foreign earnings are exempt from home-country taxation — the home country taxes only domestic income. Hufbauer and Assa document this competitive gap through comparative data on effective tax rates, profit repatriation behavior, and the geographic distribution of corporate investment, arguing that the deferral rules built into the existing U.S. system are a partial and inefficient workaround for the deeper structural problem.

A substantial portion of the book is devoted to the foreign tax credit mechanism — how it works, where it breaks down, and why the interaction between U.S. tax rates and foreign tax rates creates what the authors call cross-crediting distortions that neither fully neutralize foreign taxes nor produce clean capital export neutrality. The analysis of the basket rules, which restrict how foreign tax credits can be applied across different categories of foreign income, is particularly detailed and reflects Hufbauer's long engagement with the policy literature on international tax coordination.

The book also covers the taxation of American individuals living or working abroad, including the Foreign Earned Income Exclusion and the interaction between U.S. citizenship-based taxation and the tax treaties that attempt to reduce double taxation for U.S. expatriates. This section is comparatively brief but addresses a practical concern for a meaningful segment of the workforce in multinational organizations.

Hufbauer and Assa conclude with a reform agenda centered on a territorial tax system with strong anti-abuse rules — a position that anticipated the direction of actual U.S. tax reform, though the Tax Cuts and Jobs Act of 2017 moved in this direction in a different and more complicated form than what the authors proposed. The 2007 publication date means the book predates both the TCJA's quasi-territorial shift and the OECD's BEPS framework, which have substantially changed the international tax landscape the book describes.

This is for tax attorneys, international tax professionals, corporate CFOs with significant foreign operations, and policy analysts who want a rigorous pre-TCJA baseline for understanding why the U.S. international tax system was structured the way it was and what the competing reform arguments looked like before the 2017 overhaul.

The weaknesses are vintage and audience. The 2007 publication date means the book's specific policy prescriptions have been overtaken — the TCJA's GILTI, FDII, and BEAT provisions, plus the OECD Pillar Two global minimum tax, have fundamentally changed the regime Hufbauer analyzed. Readers using this book as a current reference will need to layer in significant post-2017 updating. The book is also written for a policy and professional audience rather than a general business reader — the technical density of the foreign tax credit analysis assumes familiarity with the Internal Revenue Code that most business readers will not have.

For tax professionals and policy analysts who want a rigorous pre-TCJA analysis of the structural arguments for and against territorial taxation — and a credible baseline for understanding how the 2017 reform debates were framed — this remains a useful Peterson Institute-quality reference despite its age.

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About Gary Clyde Hufbauer

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