Michael Froomkin will be back full-time tomorrow, so this is my last post. I still have a lot of stuff to say on the threads to my posts, however, which I will do over the weekend, so you are not rid of me quite yet.
Thank you all! I learned a lot about stuff and the blogosphere. Thank you Michael! It has been as much work as I expected. I cannot imagine how Michael finds time to blog, maintain this remarkable site (which I had no responsibility for, and which must take up as much time as blogging), and have a life. Amazing….. And Michael just emailed that I should have my own blog….
Well, I have been stalling for weeks on the fundamental issue of international tax policy: As a practical matter, in an open worldwide economy, can one country impose an income tax? There are two sub-issues: First, can a country tax residents (or citizens) on their worldwide income. Here, can the US tax Sue on her foreign surgeries, given that she can move? Second, can one country tax income related to mobile local factors of production? For example, can the US tax the capital of Ford Motor invested in a US factory if Ford can close the factory and move production to low-tax Mexico?
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.)
Well, it is time to talk about multinationals again. I am somewhat over my head here, as this is a developing area, and I am not current in the literature. That said, here goes.
The classic analysis of the “extra” profitability of multinationals looks to market barriers. If there weren't barriers to forming a multinational, there would be new ones created seeking that extra profit. As more multinationals are formed, the extra profit goes away. After all, it must be costly to set up a business that can function legally and practically as one enterprise in many countries, or everybody would do it. Back when there were few multinationals, the market barrier analysis seemed to tell the whole story. Today?
There have been a lot of insightful comments on my posts. sorry that I haven't had time to comment back. Been dealing with horrendous computer problems. Comments on comments soon.
Yesterday, I noted, and one great comment (by the ominously named Consultant) telegraphed, that stripping is the ball game when it comes to protecting the US business income tax base. What is going on? One can get a feel for the hidden concerns here by reading between the lines of the Treasury report that I gave a link to yesterday.
In a few days, I will write more about the “extra” value in a multinational. Today, as promised, I want to talk about expatriot corporations.
A bunch of US corporations moved to Bermuda on paper to reduce US taxes. In such a transaction, technically, the old shareholders of the US operating corporation become shareholders of a new Bermuda holding company, which ends up owning the old US operating corporation. Because the old US corporation becomes a subsidiary of the new public Bermuda company, expatriation transactions are referred to as “inversions.” The tax benefits of inversions have been there for some time. But, inversions became popular only recently as corporate managers and the stock markets began accepting Bermuda corporations more.
I feel like taking a little break — two or three days —from international taxation.
Fortunately, there are even more important — at least in the medium term — tax topics. The most pressing tax issues today are presented by two time bombs in current law: (i) the sunset of the Bush tax cuts and (ii) the metastasis of the alternative minimum tax.