Tuesday, July 17, 2012

The presidential campaigns debate international tax policy

I was bemused to see in today's Times that Obama and Romney spent some time yesterday debating a Tax Notes article on U.S. international taxation published by Kim Clausing.  She and I recently co-authored an article in the Tax Law Review, and the likes of us are usual toiling far from the harsh glare of an active presidential campaign. 

Clausing's article is available as published, though perhaps just for Tax Analysts subscribers, here. If that link doesn't work for you, a working paper version is publicly available here.  It makes three main points.  First, while there is lots of talk in the U.S. about shifting to a territorial system, under which U.S. companies' foreign source active business income would be exempted from U.S. tax, it makes a lot of difference how one goes about doing this.  Many of our peer countries that have shifted to territorial or exemption systems have kept a lot of features in their rules that address efforts by resident multinationals to shift either reported taxable income or the actual locus of investment from the home country to tax havens.

Second, she estimates that, if the U.S. shifted to a pure territorial system without similar features, the U.S. companies would shift their activities in such a manner as to increase employment in low-tax countries by about 800,000 jobs.  This is based on empirical estimates regarding various relevant parameters, from her own work and that of other leading empirical researchers in the international tax policy realm.

Third, under normal macroeconomic circumstances, it is plausible, notwithstanding all the recent campaign talk about outsourcing, that this would not result in any net U.S. job loss (although it is possible that lower-wage jobs would replace higher-wage jobs).  In a full employment scenario, U.S. employment would merely be reallocated, and indeed there is research suggesting that cheap labor abroad can actually be a complement to particular U.S. jobs.  But in the current state of our economy, steeped as it is in a deep recession (whether it meets the official statistical definition or not), with persistent high unemployment and inadequate overall demand, the scenario in which lost jobs here do not end up being replaced any time soon is unfortunately all too plausible.

Against this background, Obama had some fun saying that Romney would create jobs all right, only they wouldn't be created here.  Romney's campaign didn't respond directly, but Republicans who spoke to the Times authors made a couple of main assertions.  First, they argued political bias.  But Clausing is a well-respected researcher - listed, for example, by the International Tax Policy Forum (ITPF) as one of the authors whose research it supports.  The ITPF is a respected nonpartisan research organization, but one that is funded by leading U.S. multinationals and definitely could be viewed as lining up on that side of the debate.

Second, the pro-Romney sources noted that territoriality has been favored by Obama advisors as well as by the Bowles-Simpson panel.  True enough, but again the key question, if you shift to a territorial system, is exactly how you do it and when.

These are topics that I am writing about right now (and indeed almost literally so, since the moment I finish this post I will be opening my docx file for chapter 4 of my book in progress on international tax policy).  So I will have a lot more to say about these issues in the right time and place, but perhaps not right here and now, as there is no simple rifleshot takeaway that would do justice to the entire subject.

4 comments:

Scollon Taylor said...


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Calvin Brock said...

As noted in earlier posts, I am a bit reluctant to use the effective tax rate number in discussing Romney's tax returns because of what it leaves out, namely losses and deductions that may have significantly reduced his adjusted gross income in some years. matawan income tax preparer

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