Document Type



The international tax regime is facing a defining moment. As stories of multinational companies expatriating and shifting income around the world with seeming impunity continue to emerge, the question of how to divide the international tax base among the countries of the world increasingly draws attention from policy-makers and academics. To date, however, the debate has tended to devolve into one over the two traditional tools used to divide worldwide tax base—transfer pricing and formulary apportionment. This Article demonstrates that such focus is misplaced on the instruments of dividing the worldwide tax base rather than on first principles. Instead, this Article will adopt the first principle of maximizing the efficiency of the worldwide tax regime under two key, but realistic, assumptions: first, that the presence of multiple states in the world is efficient and, second, that there is a declining marginal utility to public goods. Under these assumptions, dividing worldwide tax base efficiently requires balancing the goals of maximizing the neutrality of tax laws and the provision of public goods across all countries.

Based on this result, this Article explains how the modern debate has inappropriately focused on how to capture tax base or prevent corporations from shifting income across jurisdictions rather than how to build a new international tax regime for the modern international order. The Article then demonstrates that the traditional approaches to international tax will be inefficient under the stated assumptions. Instead, this Article will propose a hybrid regime in which each country is entitled to tax a portion of worldwide tax base based on that country’s amenities and then the relevant countries will divide the remaining common tax base among themselves so as to maximize the return to worldwide public goods. By taking into account both capital flows and public goods provisions in this manner, the efficiency of the international tax regime can truly be maximized.