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One darn thing after another

It's been hurry-up-and-wait for me the last few days. First I was hurrying up, and now I am waiting.

I seem to have overbooked myself a bit. On Wednesday, I presented my new paper "The Case Against Foreign Tax Credits" at Penn Law School. On Thursday, tax policy colloquium day at NYU, featuring Ruth Mason and Michael Knoll with their paper, "What is Tax Discrimination?" On Friday, I presented my foreign tax credits paper at a UNC Tax Symposium featuring mostly economists and accountants. (I am the only legal academic here, out of about 70 people, although another was in attendance briefly yesterday and an economist who is a law prof is here.)

A touch of snow down here in North Carolina has given local services the jitters. My 4:40 pm flight was already canceled by 7 am, and I am currently scheduled to leave tomorrow, but I suppose we will see if that actually happens.

The talk at Penn went fine. Interesting questions, no need to rethink the piece except perhaps a bit expositionally.

Mason and Knoll, in their tax competition paper, are taking on cross-border labor questions - essentially just the taxation of commuters (such as between EU countries, a topic of extensive recent European Court of Justice litigation on some rather narrow topics, e.g., giving foreign workers the personal exemption). The analysis they offer, which is founded on adapting the CEN - CIN - CON framework for corporate income taxation to these questions, generally gets called off if I actually move from one country to another, given that I now become a resident of the latter so it's no longer cross-border. (Leaving aside issues of U.S. citizenship, as the U.S. taxes nonresident citizens.) There are some problems with adapting the capital framework to labor, however. For example, labor mobility is much lower, and while a U.S. firm can have operations in both the U.S. and Germany, I probably cannot work in full-time jobs in both countries at the same time.

Okay, on to my foreign tax credit paper presentation here in North Carolina. Here the main points I took away from the session were as follows:

(1) While the central point I make strikes me as verging on obvious - that, from a unilateral national welfare standpoint, a foreign tax payment is no different from any other expense, which means that foreign tax credits induce an undue lack of cost consciousness by taxpayers - not everyone seems to get it. People still seem inclined to regard the problems I point to as merely involving instances of foreign tax credit "abuse." Oh well - this is why I think my paper is important (if I may say so): because apparently the central point I make isn't obvious enough yet. Of course, there is nothing wrong with being obvious ex post if, ex ante, people thought you must be obviously wrong.

(2) While my central point is really that we need to modify how we think about international tax rules, I noted in the paper that a possible consequence of my analysis is that a "burden-neutral" replacement of the current U.S. international tax rules by a system in which foreign taxes were merely deductible but a reduction in the tax rate on outbound investment - say, to about 5% - kept the aggregate burden on outbound the same - might conceivably be desirable. This led to my paper's being discussed as if it were a campaign proposal. Hence, two lines of criticism:

(a) "You're increasing the incentive for U.S. multinationals to report foreign, rather than domestic source income." Yes I am, if you're thinking about the change in rate but have forgotten to keep in mind the by hypothesis constant overall residual U.S. tax on foreign source income. It would have been analytically preferable for people not to forget this.

(b) "You're not also offering cookies," which other proposals would do. Yes, I like cookies too, but this paper is not about them. For example, it is not about exempting foreign source income, which I rule out simply as a policy change at a different margin than the one I'm addressing. It also is not about whether we should lower the domestic U.S. corporate tax rate. I suppose that, in the next draft, I could also propose worldwide carbon taxes to be adopted by all nations, since the draft as it stands does absolutely nothing to address global warming.

A further misunderstanding, as I saw it, likewise reflected my evidently having induced misreading of the paper (relative to my intent) as a campaign proposal rather than a thought piece. I got the critique: "You say foreign tax credits have these bad incentive effects, but in the U.S. system they sometimes don't." U.S. multinationals are cost-conscious about foreign taxes, for example, if they face the credit limit or can use deferral to put off the residual U.S. tax for a long time or perhaps forever. This is true, and I had thought the paper actually said this. Indeed, I thought I had placed some emphasis on their being necessary limits on the harm that the foreign tax credit does (given how it messes up incentives) that end up creating their own distortions. But, in any event, those are points about the extent to which we actually have a pure worldwide foreign tax credit system. Hence, they really are not germane to the question of how to think about the foreign tax credit as a policy tool (except insofar as, by showing the need for awkward and arbitrary limits, they strengthen rather than counter my central point).

The next draft, which I will post on SSRN once I have the time to make a couple of very modest changes, will place extra emphasis on the fact that this is a thought piece, not something I'm planning to rush down to Treasury or the House and Ways Means Committee as the Shaviro Plan, my Springboard to Power. Perhaps someone else, writing word for word the same paper, would have meant it that way (although I really don't think so). But I am an art for art's sake person, and would rather fix ideas correctly than battle to get my name on a statutory monument.

Full post as published by Start Making Sense on January 30, 2010 (boomark / email).