The case against deferral: A deferential reconsideration

The ability to defer home country taxation of foreign income is widely crit icized as encouraging excessive foreign investment. This criticism is based on a model in which the function of deferral is to reallocate a fixed supp ly of capital between foreign and domestic uses. In realistic situations, h owever, deferral enhances the value to home countries of inframarginal fore ign investment, taxation raises the value of marginal foreign investment, a nd the trade-off between foreign and domestic investment need not be one-fo r-one. Together, these considerations imply that deferring home taxation of foreign income can enhance economic efficiency.