This Friday, I'll be presenting my paper on rising corporate residence electivity at a meeting of the International Tax Policy Forum in Washington.
The slides, greatly shortened from when I presented the same paper (per these slides) as the 2010 NYU Tillinghast Lecture because my time slot is much shorter, are available here.
This paper has not been all that extensively downloaded, although I believe it contains important ideas, not all of which are hinted at by the title.
Among other things, I offer an admittedly sketchy preview (my international tax book, and perhaps a separate article, will offer the full-dress version) of what I think is a better analysis of the territorial versus worldwide issue than any I have previously seen.
So long as the U.S. has any market power over the use of U.S. corporate residence in investing abroad, I argue, a zero rate for foreign source income is unlikely to be a first-best even relative to the otherwise already thousandth-best character of the setting (with entity-level corporate income taxation and residence determinations, etcetera). But if one could choose an intermediate rate between zero and the full domestic rate (currently 35%), a first step would be to repeal deferral and foreign tax credits (in favor of mere foreign tax deductibility), and a second step would be to decide what tax rate for foreign source income is best, all else equal.
Exemption (with a zero rate for foreign source income) is an example of such an approach, as it has implicit deductibility for foreign taxes plus no deferral. But it differs only moderately from, say, a 1% foreign rate with no deferral and no credits.
In this setting, while I suspect that the optimal U.S. rate for foreign source income would be closer to zero than to 35 percent, I doubt it would actually be zero (for reasons I very briefly discuss, or at least advert to, in the slides). But if one rules out intermediate rates, on such grounds as treaty adherence and political economy, then exemption may be preferable to current law as the only feasible way of getting rid of foreign tax credits and deferral (which result in a system that raises too little revenue relative to its U.S. efficiency costs). At least, the case for this view strikes me as powerful if we (a) improve the source rules (such as by treating all multinationals, whether headed by a U.S. company or not, as a single unitary worldwide group) - a change that would be desirable in any event, but all the more so if income-shifting abroad would no longer carry the implicit price of creating a potential future "foreign trapped earnings" problem - and (b) address the transition issue that I also delicately advert to in the shortened slides.
Be all that as it may, however, let me segue into one more associated topic that recently came to mind, in connection with the vanishingly slim (if not indeed zero) prospect of a serious push in the next couple of years for significant corporate rate reductions that are financed by corporate base-broadening.
Eric Toder has an excellent post at the Tax Policy Center's Tax Vox blog in which he runs through the main corporate "tax expenditures," as per the prevailing official lists, that could be curtailed in order to finance a corporate rate cut. He notes that # 1 on the list, in terms of current revenue cost, is repealing deferral and going to a pure worldwide system (foreign tax credits aside) for U.S. companies' foreign source income. The continuation of deferral is estimated to cost $169 billion over the next few years, although Eric notes that the revenue actually raised from repealing it might be significantly lower - among other reasons, due to the tax planning responses one would expect in the case of repeal.
Once we agree that deferral is a tax expenditure, meaning that the baseline is a worldwide tax, it becomes hard to disagree with going to a pure worldwide system - other than on the ground that one happens to favor more "preferential" treatment of U.S. taxpayers in this respect, which opens the door for others to say "Me, too!" about their own favored preferences. But it is difficult to make a compelling case for the bedrock principle that legal entities - as distinct from individuals - should be taxed on a worldwide basis if and only if they are U.S. residents. Corporate residence means so little normatively. Is it a bedrock principle of a theoretically pure income tax system that the foreign investments I hold through a corporate entity should be taxable in the U.S. if I incorporate in Delaware but not if I incorporate abroad?
As I explain here in my article on tax expenditures (albeit just in general terms, as I dodged international issues in the piece), this type of use of the tax expenditure concept is neither intellectually persuasive nor likely to prove very helpful. I would put deferral, as well as foreign tax credits, in my category of "disputed" items in which there are mutiple alternative baselines (here, worldwide with credits, worldwide with deductions, and exemption of foreign source income).