by Alicia H. Munnell
September/October 1992

Taxation of income from capital is difficult in today’s global economy, where financial markets are international, investments flow freely over national borders, and multinational corporations abound. Yet fairness and equity require that capital income be taxed.

This article reviews the options for achieving improved harmonization of taxation within the European Community (EC). A formula apportionment system, such as exists in the United States, could help EC countries curb tax avoidance by corporations that shift income away from subsidiaries in high-tax areas. The author also considers the "unitary combination" approach, whereby a business is considered a single taxpayer if it has unity of operation, ownership, and use. A combination of these two approaches might permit the EC to adopt the beneficial aspects of the U.S. system, without repeating all its mistakes.

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