Reform of the U.S. international income taxation system has been a hotly debated topic
for many years. The principal competing alternatives are a territorial or exemption system and
a worldwide system. For reasons summarized in this Article, we favor worldwide taxation if it
is real worldwide taxation; that is, a nondeferred U.S. tax is imposed on all foreign income of
U.S. residents at the time the income is earned. However, this approach is not acceptable
unless the resulting double taxation is alleviated. The longstanding U.S. approach for handling
the international double taxation problem is a foreign tax credit limited to the U.S. levy on the
taxpayer’s foreign income. Indeed, the foreign tax credit is an essential element of the case for
worldwide taxation. Moreover, territorial systems often apply worldwide taxation with a foreign tax credit to all income of resident individuals as well as the passive income and tax
haven income of resident corporations. Thus, the foreign tax credit also is an important feature
of many territorial systems.
The foreign tax credit has been subjected to sharp criticisms though, and Professor
Daniel Shaviro has recently proposed replacing the credit with a combination of a deduction
for foreign taxes and a reduced U.S. tax rate on foreign income. In this Article, we respond to
the criticisms and argue that the foreign tax credit is a robust and effective device.
Furthermore, we respectfully explain why Professor Shaviro’s proposal is not an adequate
substitute. We also explore an overlooked aspect of the foreign tax credit—its role as an
allocator of the international tax base between residence and source countries—and we explain
the credit’s effectiveness in carrying out this role. Nevertheless, we point out that the credit
merits only two cheers because it goes beyond the requirements of the ability-to-pay principle
that underlies use of an income base for imposing tax (instead of a consumption base).
Ultimately, the credit is the preferred approach for mitigating international double taxation of

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