Herewith some quick notes on one of the three panels in which I participated at NTA New Orleans. I guess you could call me a triple threat, as I moderated once, presented once, and was a commentator once.
The moderating gig was for a panel on corporate tax reform, with Rosanne Altshuler, Peter Merrill, and Martin Sullivan. As background, at a session the day before, it became clear to me that Rick Perry jokes have not yet reached their sell-by date, although I would imagine it won't be much longer. There are only so many changes you can ring on the theme of having three things to say and forgetting the third.
But it occurred to me at that prior day's session that I had a fairly good Rick Perry joke in mind that I could use at the corporate tax reform panel. I won't try to re-create it word for word here, but suffice it to sketch out the basic idea, which was that, if Rick Perry, rather than Herman Cain, had been the candidate who was pushing the 9-9-9 plan, he would have forgotten the third 9.
Anyway, at the discussion panelists noted that international is really the key issue even if we are thinking about domestic corporate tax reform. At least for now, Congressional Republicans, no less than the Administration, are committed to revenue neutrality if they lower the domestic corporate rate (say, to 25 percent) and also so if they enact some version of a territorial system that exempts at least a substantial swathe of foreign source active business income. But international looms at center stage even just with respect to the first of these ideas.
In this connection, I mentioned a central conundrum that I gather has been baffling policymakers from both parties. On the one hand, we keep hearing about corporate tax avoidance, such as in newspaper articles about the likes of Google and GE. On the other hand, the revenue estimators and those conversant with them keep telling the policymakers that it is extremely difficult to finance a lower corporate rate through base-broadening. How can both of these propositions be true? Shouldn't we be able to make the "headline babies" pay more through base-broadening?
The answer, of course, is that base-broadening, as conventionally conceived in terms of explicit tax preferences, has only a very limited overlap with multinationals' (MNEs') modern tax avoidance techniques. They mainly exploit structural weaknesses in the income tax, and above all the ease of transferring economic value that arises from people's activity in the US (such as when Google-bots create valuable IP in California, or wherever it is they work their magic) so that the resulting taxable income will appear in someplace low-tax and far away, such as Bermuda.
Thus, aggressively addressing problems with the source rules - or enacting worldwide taxation without deferral for suspect classes of foreign source income - is crucial to revenue neutrality here, as well as to ensuring that the domestic US corporate tax base - which vitally backstops the income tax on individuals for high-flying owner employees - is not entirely gutted with respect to MNEs, leaving it to fall just on domestic businesses (which might then become takeover targets by reason of the tax synergies).
One last point worth noting here, before I adjourn to the next post to discuss the other other panels I was on, is that it's extremely misleading to hear the constant refrain about how the US is "out of step" because everyone else has shifted to exemption. This statement is only true if one is extremely simplistic in using a one-zero scale to classify each international tax system as either US-style or territorial.
What such a classification misses is that most "territorial" countries make some effort to address the Google-style problems that many U.S. advocates of territoriality appear eager to embrace or at least ignore. In other words, the putatively territorial countries impose tax on a lot of "foreign source income" as to which there are grounds for suspecting that it is actually domestic source.
For example, a number of territorial countries limit exemption to foreign source income that is earned in other high-tax countries. The rationale arguably is not what it seems - that one wants domestic companies to pay more rather than less tax abroad - but rather that income which shows up in a tax haven probably wasn't actually earned there, and thus may well have been earned at home.
In my view, limiting exemption to investment in other high-tax countries is the wrong response to the problem, for the same reason that I question the foreign tax credit. From a national welfare standpoint, there is nothing wrong, and indeed it is affirmatively desirable, for one's companies (if owned by domestic individuals) to pay less tax abroad rather than more. Thus, I would counsel alternative means of in effect "tagging" the ostensibly foreign source income that is relatively likely to represent game-playing that erodes the domestic tax base. For example, rules concerning intangibles and intellectual property, as well as interest expense, may be able to serve the tagging function without incentivizing resident companies to pay "just enough" tax abroad to avoid the rule and consequent full domestic taxation.
More on this in due course as I try to advance my still not-entirely-formed thinking about source issues.