US Taxation of Multinational Enterprise: Part XIII

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 have no special insights into these issues. The conventional wisdom, which I agree with, is that no country acting by itself can deal with enforcing an income tax on mobile capital and individuals. International cooperation is required.

Tangent: This is where I got the idea for a multinational treaty discussed yesterday. The idea of negotiated sharing (sourcing) of the revenue base is not part of the conventional wisdom, however. Somebody suggested base sharing to me in passing about 20 years ago (as part of Treasury's discussions surrounding California's unitary tax). Back then, I rejected base sharing so quickly, that I even forgot who mentioned it to me. Don't want to risk slandering somebody by guessing. But, as the problems of an income tax in an integrated world have become more clear, the power of negotiated base sharing stuck, if not the identity of who mentioned it to me.

The hard part is that the multinational treaty required to deal with mobile factors must address tax rates, not just sourcing and enforcement. Only by having one world-wide rate of tax (on the same basic base), after adjusting for differences in local services (which adjustment is impossible, of course), can one assure that taxes not affect location decisions. Boy, a tough nut to crack. The US certainly doesn't want as big a government as in Europe. But, VATs, which are less sensitive to location problems (but do have problems with e-commerce), can be used to fine-tune the size of a given country's government.

There are some halfway measures. For example, today, the US has rules that reduce the tax benefits to an individual from expatriating artfully. International cooperation helps in enforcing such rules. But, going beyond policing citizenship and residency to place restrictions on international flows of capital or services just to solve tax problems seems like the tail wagging the dog.

Well, nobody said it was going to be easy. Like a true academic, as Johnny Rotten sang, I just see Problems, Problems….

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2 Responses to US Taxation of Multinational Enterprise: Part XIII

  1. pgl says:

    Low wage Mexico but not low tax. Many nations with low wages have high taxes. And the tax havens are often in places like the Cayman Islands, which have few workers and even fewer factories. OK, China and India give Tax Holidays but …

  2. GeorgeMundstock says:

    PGL, My mistake. Thanks for the correction! As a Detroit boy, I am obsessed with Ford closing the Rouge Plant while expanding production in Mexico. Maybe I could make a movie called “Bill and Me?”

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