I am sitting here reading the fine print in a contract to buy a house for a price that is three times what I sold my house in Minnesota for. I am not UMC in Miami, I guess. Forgive me if I am even less coherent than normal — and that I haven't had a chance to do more commenting.
Oh, well, back to taxing the nowhere and everywhere profits of multinationals. The world-wide network of tax treaties rests on the arm's-length notion, which, I have argued (and the comments seem to be moving somewhat — somewhat — toward accepting), misses nowhere and everywhere profit. This is real important, as failure to tax nowhere and everywhere profit guts business income taxes as a source of revenue for countries. (Yes, tax jocks, the current US regs, whiile pretending to be arm's-length regs, do capture some nowhere and everywhere income.)
Quick Meta Tangent: In an open, world-wide economy, it is not clear who bears the burden of one country's income tax. Thus, it is not clear why we want to keep income taxes. (But, I do, as a matter of faith.) Even if one is uncertain about income taxes in general, however, one should be bothered by multinationals getting a special break on one type of profit.
I have a very academic, not very novel, big government, law and economics inspired, fix: Rather than the current network of hundreds of bilateral tax treaties, we need a huge multinational tax treaty. The participant countries would work together to carve up business profits consistently in a fashion that seems reasonable to them. In other words, I would substitute governmental negotiation for policy makers trying to figure out where income is earned.
There is some reason to believe that negotiated tax bases might work: Negotiated carve-ups happen today. Under bilateral tax treaties, a multinational can request the two countiries involved to work together to avoid double taxation. A few really big multinationals have been the subject of such negotiations. These negotiations ultimately result in the countries involved carving up the income of the multinational in a fashion that is acceptable to all parties.
Obviously, a huge multinational tax treaty is so large and difficult an undertaking that only a 20-year academic would waste time thinking about it. (And don't even think about what America's right wing thinks about multinationalism.)
Also, under my proposal, as in every bargaining, there are problems from unequal negotiating positions. In particular, the US would be tempted to overreach. (In an earlier post, I mentioned how the Kennedy and Johnson administrations used bilateral tax treaties to protect developing countries. Those days are gone, sniff…) The multinational nature of the negotiation process that I propose is intended, among other things, to reduce the impact of uneven negotiating positions by enabling countries with similar interests to act in concert. More naive academic theory (from someone who knows little bargaining theory), perhaps. I submit, however, that multinational cooperation is the only workable long-term solution.
Tomorrow: Finale: Keeping Sue home