Idiotically formalistic though this might be, I viewed it as just deserts for the formalistic legal norm that income must be taxed only once, a norm under which being taxed ten times at a 1% rate each time would be a horrid injustice, whereas being taxed once at 35% would be unobjectionable.
However, Fadi Shaheen, in a message that he has authorized me to quote (I don't otherwise spill the beans here on private communications), says the following:
"1. Wouldn't Option Z keep, if not increase, the complexity the FTC has been causing, which would be better addressed by deductibility? I thought that was the main advantage of deductibility over partial creditability ...
Some quick responses: On Point 1, agreed that the arcane complexity of the foreign tax credit regime would still be on the books if we adopted Option Z, as distinct from simply making foreign taxes deductible (or deductible-plus in some fashion, but short of 100 percent reimbursement). I was only thinking about the marginal incentive effects on paying higher rather than lower foreign taxes when I wrote the blog entry. But on the other hand, with the marginal reimbursement rate on foreign taxes effectively reduced from 100% (in the scenario where deferral has been repealed and foreign tax credit limits do not apply), maybe one could ease up on the existing FTC rules a bit, as their attempted rigor responds to the total lack of cost-consciousness re. foreign taxes that a 100% credit can induce.
On Point 2, agreed as well. When you have a formalistic rule, evaluating wholly formalistic questions of when it is or isn't being breached is not going to be a very intellectually edifying (or stimulating) exercise. Hard to say how this would play out in practice. The underlying question is whether U.S. treaty partners would get upset or not, and what role formal legal arguments would play in making them more tolerant of the end result. I was speculating that creating a decent formal argument that there is no "double tax" might help ease the way to limiting controversy, even though it means that equivalent systems get classified differently.
The one bit of substance that avoiding "double taxation" via the Option Z DOES have is that it requires equivalence between (a) the ratio between the "true" statutory tax rate for a full dollar of FSI and that for domestic source income, and (b) the marginal reimbursement rate for foreign taxes. It's hard to see why the foreigners, in deciding whether to be outraged or not by U.S. adoption of Option Z, should care about this equivalence one way or the other. But, then again, formalistic legal exercises have this way of making distinctions that matter little for their own sake potentially dispositive.