Wednesday, April 24, 2013

TV appearance tonight, and the "iron box" in international tax policy

Tonight at 8:30, I'm on Al Jazeera English (Inside Story, Americas), for a 20-minute panel discussion of corporate tax avoidance.  (Mainly legal avoidance, but also with reference to illegal evasion, such as by individuals who use fake companies.)

I have no idea how I looked, as I was in a dark room in a TV studio (no monitor) while the host and other guests were elsewhere.  But these sorts of things always matter more to oneself than to others who see one.  (I am also among the countless people who don't like hearing the recorded versions of their own voices, as it sounds different from the inside.)

The overall discussion was definitely more on the side of criticizing corporate tax avoidance than one one would expect from, say, CNN or one of the networks.  But also, if my impressions as it was ongoing were accurate, a bit more in-depth than one would normally get from a TV talking heads cattle call.

The news hook for the session was the recent report that Apple is borrowing money in the U.S. to fund dividend payments and/or share repurchases, even though it has tens of billions of dollars in earnings stashed in tax havens abroad.  The reason for this wasteful transaction form, of course, is to avoid a taxable repatriation of foreign earnings.

The great thing about deferral, the aspect of U.S. international tax law that gives rise to this absurdity, is that both sides in the debate hate it.  There would be no reason for Apple to do this if we either (a) enacted a territorial system (making earnings that were reported as foreign source excludable from U.S. income even when they come home) or (b) repealed deferral while otherwise keeping our worldwide system, thus making the earnings taxable even while parked overseas.

But neither approach is particularly attractive on other grounds.  A territorial system increases the rewards to tax avoidance and profit-shifting.  A worldwide system on the current U.S. model, but without deferral, would over-tax U.S. corporate residence (relative to our market power over this attribute) and would generally eliminate U.S. companies' incentive to pay less rather than more foreign taxes.  Hence the set of dilemmas that arise when we try any marginal move within the current structure - since lessening any one distortion generally makes others worse - dubbed by me the "iron box" in my forthcoming book on U.S. international taxation.

Read my book when it comes out for a fuller account of how one could try to ease (although not entirely solve) the underlying intractable dilemmas.

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