Friday, December 22, 2017

Fun for the holidays?

Despite my often writing articles and even a book about international tax policy, I've been a bit remiss so far in my degree of focus on the international rules in the tax bill. They're complicated and so is thinking about them, I wanted to make sure they were final so I wouldn't waste time on proposals that disappear, and I've been focusing on other aspects such as the passthrough rules.

Plus, I have other academic writing interests that, at the moment, grab me a bit more. My book about literature and high-end inequality is # 1 in this regard, but I'm also writing a short paper about the destination-based cash flow tax on a short time fuse.

That paper will be based on the various versions of slides that I've posted in the past, such as here, but it will be much more focused on the academic literature than on last year's Republican House proposal, which I would presume is politically dead. My main point is that academics should move on from it, too - it's a multi-instrument package, and each of the instruments is worth taking seriously, but the packaging serves no good purpose and should be dropped, as it only confuses even experts who should know better.

A couple of months ago, I wrote a first draft of a short international tax paper, which I haven't posted or submitted anywhere. It's now partly obsolete due to the new 2017 tax bill. But that's actually a good thing, even from the comically self-centered standpoint of a writer with sunk costs. I felt a bit bored at times writing the piece, not always a recipe for one's best work (although I think it has some good features), and I now have something fresh to put into it, i.e., responding to the new international rules in light of the framework that I use in the piece, which is based on my past international work.

So I have given myself homework for the holidays, in the form of printing out the international provisions in the final bill and conference report (I'm still old-fashioned enough to prefer paper for non-casual reading that is long-form), plus a few associated items that will help me think about them. And I plan to take more of a deep dive over the next couple of weeks than I have so far.

My initial sense of the international tax rules in the final bill is that they are less bad than the other features I have been discussing. That's a pretty low bar, of course, when one has been thinking about the passthrough rules. But a couple of points in favor of the new international rules, compared to the bill's worse elements are:

1) They started from what everyone agrees is really bad present law. (By contrast, the passthrough rules gratuitously screwed up something that was previously working fine, i.e., the absence of any such rules.) This inevitably affects a fair assessment of whether they have made things worse. Case in point, they've created incentives to move assets abroad, but under present law one may already have such incentives.

2) One thing that's distressed me elsewhere in the bill is frequent lack of concern about tax avoidance, where that's defined as taxpayers getting favorable results that don't follow from a good faith policy aim. Case in point is not trying to limit exploitation of the 21% corporate rate by personal service corporations and the like. People incorporating so they can get the low rate for their labor income is NOT part of any reasonable rationale for lowering the corporate rate in response to international tax competition. Then, in the passthrough rules, while they make some effort to limit the ability of some service professionals to take advantage, the whole thing is so unprincipled to begin with that I've noted that I can't see what the concept of undue tax avoidance even means there, unless one defines it as people and industries that the Republicans like versus those that they don't like.

International is different. The extent to which they wanted to address tax avoidance seems clearly to have been greater than zero. Whether it's adequate or well-executed is another question, but at least we are starting here from a higher baseline.

I also note that they seem to have at least gestured towards, and perhaps even implemented to a degree, a couple of ideas that I have been pushing in international tax policy debate. The first is steering away from what I call a 100% MRR (marginal reimbursement rate) for foreign taxes paid. Foreign tax credits that are allowable immediately are only one mechanism for having a 100% MRR in practice. Global "minimum tax" rules can also have this effect, as can anti-base erosion rules in some settings where they focus either directly or indirectly on shifting foreign income to tax havens.

A second idea that I've been pushing, and that I believe the bill reflects (but will have to study it more carefully) is that one's base erosion rules shouldn't over-rely on domestic residence.  Prior U.S. international tax law, even if it did too little overall about base erosion, did too much of what it did via the subpart F rules, which only apply to U.S. companies with foreign subsidiaries. The ability to have controlled foreign corporation (CFC) rules, like our subpart F, for domestic companies but not foreign companies means that one can do more to address (and fine-tune one's addressing) base erosion by the domestic than the foreign. This creates a tradeoff, in that one may want to take advantage of the extra tools where one can, but there may otherwise be no reason to treat the residents worse than the nonresidents. Again, there appears to be some of this in the new rules, perhaps reflecting the political ease of going after foreign relative to domestic multinationals.

Some of the biggest defects in the new international rules may be multilateral or strategic. Obviously there is the treaty issue that Rebecca Kysar has been writing about, and that we discussed in both Games 1 and Games 2. Plus there are strategic issues: even insofar as doing X benefits the U.S. unilaterally - i.e., in the case where it doesn't change what anyone else does - what if other strategic players actually do respond to us? The prospect of both imitation and retaliation can affect how we think about taking a given step, keeping in mind that the question here is how others change what they do by reason of what we did.

So there's a lot for me to think about, but I do think I will end up sounding more measured, simply because a measured (even if in some respects critical) response seems more likely to be deserved.

Anyway, if I can bear to read all this stuff over the holidays - and, if not, I'll do it in early January - then I will have some updates on what I think about it, eventually I'd presume in academic writing but initially here.


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