Semantics and substance

Al Warren has published a piece in SSRN that evidently was inspired by my work on how international tax rules can affect resident multinationals’ incentive to minimize their foreign tax liabilities.  As readers acquainted with the field may know, I have emphasized the importance of considering the marginal reimbursement rates (MRRs) that companies face in particular circumstances.  For example, if paying $1 of foreign tax would reduce the present value of a given U.S. company’s expected U.S. tax liability by 60 cents, that company faces a 60 percent MRR.

Warren has added a useful semantic point to my analysis.  It has occurred to him that with, say, a 35 percent U.S. corporate tax rate, permitting taxpayers to claim as a foreign tax credit 35 percent of the foreign taxes they pay would create the same MRR as a normal deduction, while a roughly 285% deduction (i.e., deducting just over $2.85 if one paid a dollar in foreign tax) would create the same MRR as a normal foreign tax credit.

Oddly, Warren’s piece could be read as implying that I focus on the labels of deduction versus credit, rather than on rules’ actual effects.  But that of course cannot be so, as the entire purpose of my MRR concept is to look past labels to measure the effective U.S. tax benefit that resident companies obtain from paying foreign taxes.  Consider, for example, the following passage from my book, Fixing U.S. International Taxation:

“[I]t would be a considerable surprise if the unilaterally optimal solution involved having, at any given margin, a company’s U.S. taxes increase by a dollar when it reduced its foreign taxes by a full dollar (i.e., the creditability result, whether or not it formally reflects offering foreign tax credits). Instead, the optimal solution might involve companies reaping a worse-than-deductibility, albeit better-than-creditability, marginal result from reporting profits in tax havens.”

Despite any possible confusion, I am glad that Warren was able to learn and benefit from my work, and that he has offered an interesting extension.