Martin Sullivan, in his review of my international tax book here, rightly notes that I "stand out from the rest of the international tax reform crowd" in what he (OK, fine) calls my "strident opposition to the foreign tax credit."
The reason for the difference is that I look at what the FTC is capable of doing (i.e., entirely eliminating cost-consciousness by U.S. multinationals) rather than just what it currently does (mainly not doing so, by reason of how deferral blunts the incentive effects that FTCs would have standing alone).
I'll admit that I got to my point of view by thinking about FTCs in the abstract, rather than in practice. But the reason my perspective is important is that it shows what FTCs would do if surrounded by a different set of U.S. international tax rules - which people on various sides often propose changing without prior reflection about the interactions.
An example is the "minimum tax" idea that gets thrown about in Washington these days - possibly meaning, although it varies with the context, that US multinationals would automatically owe at least 20% of their worldwide income (computed without respect to deferral) to the US government, subject to a dollar-for-dollar offset by FTCs. This rule change, by effectively repealing deferral up to the 20% line, would indeed cause US multinationals to be wholly indifferent to foreign taxes up to the point where they hit the 20% threshold. So it might cost the companies money without raising significant revenue for the US government.
Another example of the broader point surfaced today in a Reuters article on the OECD's BEPS project (aimed at base erosion and profit-shifting). The article states that IRS deputy commissioner Michael Danilack has noted that "some foreign countries are using the BEPS project as a reason to get more aggressive on [US] companies' tax audits.
whole BEPS discussion has encouraged countries that felt they weren't
getting their fair share to be more aggressive,' he said, warning of 'a
great, big sucking sound"' of U.S. tax revenue declines.
United States could lose revenue under BEPS, he said, because the IRS
offers foreign tax credits to U.S. companies for taxes that they have
already paid to foreign governments.... [Thus, i]f
a foreign government collects more taxes from U.S. companies, then the
IRS might have to issue more tax credits, which could undercut U.S.
corporate tax collections."
If we are dickering with foreign governments re. who gets the money if U.S. multinationals have to pay more to someone - with the companies themselves being a key, but independent, strategic player whose actions both sides must take into account - then it's not an incredibly great bargaining position to say, in effect: "We're warning you - if you grab the money, we will respond by conceding every single dollar to you, even if we simultaneously toughen up our own rules."