Tuesday, July 09, 2013

Everyone's a critic

Wouldn't it be boring if everyone agreed about everything all the time?  Two recent emails that I've received from readers of this blog raise interesting points in response to each of my two blog posts from yesterday.

The first relates to this commentary about particular investors paying a steep premium to Thomson Reuters so that they could get the results of an economic survey that it was publishing, two seconds before everyone else, thereby giving them a large enough time window to reap huge trading profits.  A correspondent notes that the investors were in effect funding the survey, since Thomson Reuters had paid the University of Michigan for the publication rights, presumably with an eye to its own bottom line.  Hence, the investors were financing the provision of information to everyone else, although to be sure this wasn't out of generosity - the information's special value to them rested on its being communicated so that it would move prices, rather than on its informing them along with everyone else about the state of the economy.  But still, one could therefore view the transaction as merely price discrimination on Thomson Reuters' part, in the course of providing an informational service that has social as well as market value.

Fair enough.  And I didn't take a position on whether, say, the transaction, and Thomson Reuters in particular, deserved the legal scrutiny that they apparently were receiving from the New York State Attorney General's office.  I was using it as an illustration of how financial firms can and often do get rich via rent-seeking, rather than socially productive activity, and I'll stand by that as a general proposition even if in this case one can point to a positive spillover.

Second, with regard to this commentary concerning Larry Summers' recent op-ed on international tax policy, a correspondent suspects that the op-ed relates to an Obama Administration goal of proposing what would effectively be a territorial system, though with a  required 15% minimum worldwide rate on foreign source income, for U.S. companies.  One might get there as follows.  Summers proposes a worldwide tax on U.S. companies, with no deferral but only a 15% U.S. tax rate on foreign source income, and with full allowance of foreign tax credits against this liability.  This is equivalent to saying that we will exempt the companies' foreign source income so long as they pay at least 15% in the aggregate abroad.

Whatever the relationship or non-relationship between the Summers op-ed and current Administration thinking, I do think that this equivalence helps to show why getting rid of foreign tax credits is such an important part of well-designed international tax reform, and also why such a "minimum tax" system for foreign source income would be ill-chosen.  There would be little point to enacting a system that made U.S. companies pay a bit more abroad but that didn't raise any revenue for us (because the companies made sure to stop their overseas tax planning - albeit, not necessarily their profit-shifting out of the U.S. - once they had lowered the overall foreign rate, which is itself a manipulable concept, to 15%).  Yet this may be what the Administration is thinking of proposing, although I hope not.

In any event, it would be surprising if Summers, who for all his impressive abilities and knowledge is not an international tax specialist, is fully apprised of the problems that result from foreign tax creditability.  This in turn reflects the defects in the existing literature, which for the most part turns a completely blind eye to these problems apart from decrying the less than fully coherent category of foreign tax credit "abuse."  One of my forthcoming book's main aims is to address and correct this defect in both the literature and prevailing public policy debate.

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