Last Friday, I gave a talk on my worldwide welfare paper at the International Tax Policy Forum. This is a group, organized and funded by U.S. multinationals, that sponsors and disseminates research on international tax policy issues. Needless to say, there is a particular point of view that they strongly prefer, not entirely unrelated to the interests of the funders. But they are a high-brow group that takes an interest in good quality research, rather than hackery. Making this easier is a belief that the empirics, properly understood, genuinely favor them.
When I present a paper there that they don't agree with, as happened this time, the aim is to influence the author to think differently, not to attack. Certainly a savvy strategy, and I have to admit not entirely unsuccessful this time. Perhaps all the more successful here because my paper has the structure, in my mind, of "If A, then B," whereas they are arguing not A, and hence not challenging the paper's argument, which rests on saying: Let's assume A for present purposes, as it is a widespread and potentially plausible view, and see where it leads.
A, in this case, is the traditional view of international tax policy, dating back at least to Peggy Musgrave's work more than 40 years ago, in which the normative guideposts are:
(1) national neutrality (a country acting unilaterally benefits from merely allowing deductions for foreign taxes paid, and should address double taxation of cross-border investment only if other countries are willing to do so as well), and
(2) possible mutual welfare gains from cooperating to address double taxation, via the efficiency enhancements achieved by promoting capital export neutrality or capital import neutrality, which unfortunately counsel very different policies in particular settings.
Given this structure, my paper discusses how the choice between (1) and (2) involves a prisoner's dilemma, and what implications this has. Normally, prisoner's dilemmas require that the players can't witness each other's behavior, but I argue that it applies to setting international tax policy even though it takes place in broad daylight.
This is unambiguously the right way to look at the issues, I would argue, if we had a worldwide residence-based tax on individuals who were fairly immobile. But once you have entity-level taxation that turns on the fiction of corporate residence, the argument I was getting at ITPF was that the normative framework may radically shift. I agree with the logic of these arguments, and again one could view them as orthogonal to my paper except that, if universally and unambiguously true enough in practice, the logic discussed in my paper might not even be worth exploring. This is something I mean to take up more in the future.
A core empirical question, we agreed, is whether outbound investments by resident taxpayers that the home country is considering how to tax are substitutes or complements for investing at home. In the (counter-factual) case of a worldwide residence-based tax on individuals, they have to be substitutes. I have $X to invest, and unless I respond by saving more (which is probably not to be much expected in this setting), then every dollar I invest abroad is thereby not invested at home.
By contrast, a U.S. multinational that is trying to raise funds from people who can invest it anywhere and with anyone may well be in the world of complements not substitutes. A good cross-border investment opportunity may simply mean that they can raise more capital to play with. If the country in which the company is deemed a resident increases the tax, those who are ultimately the sources of the capital may simply respond by investing via another company in another country. And this in turn may affect the next move made by whichever company got the investment dollar. So the complementarity scenario becomes a plausible alternative to the substitution scenario.
These guys at ITPF are good. They've got me thinking. Or rather, since I was already familiar with the general intellectual landscape here, they've got me thinking a bit more.