Policy Documents

Job Creation and the Taxation of Foreign-Source Income

Daniel J. Mitchell –
January 26, 2004

The World Trade Organization (WTO) has ruled that portions of U.S. tax law--specifically, the Foreign Sales Corporation/Extraterritorial Income (FSC/ETI) Act--provide an impermissible "export subsidy." This creates a bad news/good news situation.

The bad news is that the WTO is interfering with America's fiscal sovereignty by insisting that Congress repeal the FSC/ETI legislation or run the risk of more than $4 billion of compensatory tariffs on U.S. exports to European Union nations. The good news, however, is that this creates an opportunity for lawmakers to enact much-needed tax reforms, especially reducing the tax on income earned by U.S. companies abroad so that they can compete on a level playing field with foreign-based firms.