Friday, March 07, 2008

Intellectual progress at the NYU Tax Policy Colloquium

Yesterday at the colloquium, Mihir Desai, who will be co-leading things with me for the rest of the semester, presented his empirical paper "Foreign Direct Investment and Domestic Economic Activity," which concludes from firm-level data that outbound investment by US multinationals (MNEs) is a complement to, rather than a substitute for, their domestic investment. Hence, contrary to the "runaway plants" scenario that arguably underlies much of US international tax policy, the paper suggests that MNE investment in low-tax environments abroad does not cost the US domestic jobs or tax revenues.

One question I raised at the PM session is whether outbound investment is necessarily distinctive in this regard, if what we have in the main is a story about economies of scale and rising vertical / horizontal integration in an era when the general worldwide business environment may be transforming itself. E.g., suppose we did the same type of study regarding whether investment in California by a nationwide firm is a substitute or a complement for investing elsewhere in the US, and got the same result.

But the main topic was the U.S. international tax policy implications, about which I am reluctant to say too much because it would make this post too long and anyway I'm planning to write about it this summer. But one thing that became clear is that exempting outbound investment by US firms does not necessarily emerge as the logical consequence of the paper's findings, and that when Desai, Jim Hines, and others describe exemption or national ownership neutrality (NON) as an efficiency benchmark, they don't mean a tax policy benchmark. To give a sense of the difference, a lump sum tax such as a uniform head tax is in some settings an efficiency benchmark, but not a reasonable proposed policy. In that setting, the complicating issue is concerns of distribution as well as efficiency. In the international setting, the complicating issue is that one is choosing between inefficient tax instruments and attempting to minimize overall inefficiency.

I call this post "Intellectual progress at the NYU Tax Policy Colloquium" not because of that point in particular, but because it was one of those sessions - meeting our ideal, which one can't always do - at which the group dynamics and interplay resulted in advancing the thinking of lots of participants about these issues. It was a collective exercise and perhaps will show up in the future writings of several of us.

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