US Taxation of Multinational Enterprise: Part II

Back to my Sue hypothetical from yesterday. The right would say that we can't tax her, so we shouldn't. I prefer a more optimistic, can-do, American approach: See if we want to tax her and how, and then figure out a way to do it. (In other words, I'm putting off discussing the hard practical problems.) Also, let's ignore the European taxes for now.

So, should the US tax Sue on the income received as a consequence of her offshore surgeries? Well, she is a US citizen. The historic US view has been that US citizenship alone justifies taxation on world-wide income. After all, Teddy Roosevelt would send gunboats to protect a US citizen. This argument just seems out or date to me, however.

Sue also is a US resident. One can argue that she gets all of the benefits of living in the US and should pay her fair share of the cost of our country. This argument, while having some force, does not seem powerful enough to justify full progressive taxation.

But, there are more reasons for the US to tax Sue. In the abstract, much of the money generated by the foreign surgeries was earned while she was in the US. Performing surgeries just finished a long process. She learned her art and honed her skills in the US. Without her US life, she could not have demanded megabucks offshore. The US supported her earning process by supporting her education and the schools and hospitals where she trained. Less importantly, she arranged and prepared for the offshore surgeries in the US. All of this convinces me that the US should tax her offshore surgeries. (Remember, I assumed away a bunch of hard issues above, for now.)

I suspect that unspoken analyses like that in the preceding paragraph is why most tax types accept residency as a basis for taxation. Current residency alone may not show large current governmental benefits, but may be a good proxy for lifetime benefits that provide a sound basis for taxation.

Law types, note that this analysis is somewhat inconsistent with legal (power) notions of jurisdiction. These notions would suggest that some of the foreign surgery earnings (some amount viewed as really earned offshore) are beyond US taxing jurisdiction. Ignoring physical notions of jurisdiction is acceptable here, however, because, as it turns out, income is a concept, not a thing, and doesn't really have a geographic source!

Have I convinced you? More tomorrow.

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4 Responses to US Taxation of Multinational Enterprise: Part II

  1. Keith Durkin says:

    While I definitely see merit in your argument. I believe you have looked over the reciprocal benefit that she provided to the US by engaging in a surgical residence program. My brother is currently a resident in vascular surgery. His residency will last at least 5 years. While a resident he is required to function as full fledged doctor, and perform surgeries outside the scope of vascular surgery. For this, he is paid approximately 87 cents an hour. This is far below his FMV as a doctor, or even a resident doctor. While I understand he is getting the coextensive benefit of honing his skills, he should still receive a higher salary. People at 7-11 make more than he does. Thus, I believe the issue is not so cut and dry.

    I agree that income is a concept. I disagree that foreign source income is extemporaneous of the foreign source. I truly think geography should be linked to income. Without the foreign jurisdiction and its resident, there would be no taxable event or commercial exchange.

    Also, I believe that progressive taxation is proper because of the declining marginal utility of money.

  2. pgl says:


    Well argued! I tried in my comments to argue that section 1.482 position. But you did an excellent job. Changing my conclusion – if the IRS would only highly compensate you to work for them in transfer pricing!


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