The US system of taxation of the income of international companies has long been dysfunctional. It is unnecessarily complex and distorts business decisions while not generating large revenues, forcing higher taxes elsewhere to even out the difference. Politicians have the best chance in generations to reform and improve this system while bringing the rest of the world with them. Finance Minister Janet Yellen has already helped draft an international agreement signed by more than 130 countries. Congress must now do its thing and lock it inside.
The two approaches to international taxation are worldwide taxation, where a company’s home country taxes its entire global income, and territorial taxation, where income is taxed only by the country in which it is earned. Neither system is perfect, and both inevitably create distortions.