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
One way to approach the multinational treaty is to require corporations to attribute their income to their shareholders as income, whether it’s distributed as dividends or not, and to tax dividend income in the home countries of the shareholders.
Oh. Wait. We’ve decided that dividends are even more special than is undistributed corporate income.
The OECD in Paris works away quietly at multilateral tax coordination with a model bilateral tax treaty and a united front by big countries on tax havens. The EU has adopted regulations on withholding tax on investment income. So there’s more going on than you think.
I once suggested something similar to a former Australian Tax Office and now Big Four tax partner. It would have the multinational mail a check = 35% of worldwide income to a Brussels escrow account and have a group of independent economists sort out which national tax authorities should get what. My friend said that was too simple as he’d be out of a job.
Sometimes, you are so smart its scary. This is one of those times. Good luck on the house.
James – it’s true that the OECD is working hard to get tax law in line with George’s recommendations. Alas, there are all sorts of barriers to their noble efforts.
Don, The US’ current low rate of tax on dividends was sold in large part as relief for the “double taxation” of corporate income. Thus, it supports your integration suggestion. There, are other problems with your proposal, howver. Most obviously, enforcement. It is much, much more difficult to collect a tax from all of a corporation’s shareholders than from the corporation. Second, your proposal makes the most sense in a world of residency-based taxes. Residence countries have a hard time getting info from foreign corps, particularly when the shares are held through countries with bank secrecy laws. Also, it is not clear that the residency basis can support this much weight, as people can change residency.
PGL, Your Australian friend would have had plenty of negotiation to do, including great field trips. I worked on the “domestic help” at Treasury. The international guys who negotiated treaties got much better treatment, including gourmet coffee, in the 1980s. And those Netherlands-Antilles-in-January tans! No idea how things are today, though. But, seriously, there would have to separate rules for an awful lot of industries — much work.
I knew that the idea had been around for awhile. As I mentioned in Friday’s post, some government type suggested it to me in 1983. Maybe your idea got back to me?….
I am no expert on the OECD. The work i know has been heroic. Their model treaty has been so important, including in the development of the model US treaty. But, they seem to be slowing down. The Bush Administration’s attack on the OECD tax haven project — and the OECD’s resulting cave — must have been dispiriting. The OECD e-commerce stuff seems week, as it focuses on server location, which, while practical, seems so far removed from the real earning. And, the OECD, at least now, is wedded to the arm’s-length notion.