Friday, March 14, 2008

Tax policy colloquium on EC tax policy

Yesterday in the Tax Policy Colloquium, in our 9th of 14th sessions and the last before our one-week spring break (which I will blissfully spend in warmer climes), Ruth Mason presented her paper, "Made in America for European Taxation: The Internal Consistency Test." A lively session, in part because our usual crowd was supplemented by a number of high-spirited EC tax folk who were in town for a conference on EC tax policy that is taking place at NYU today, and indeed at this very moment.

Ruth proposes a Kantian-sounding (but not actually Kantian) diagnostic for tax discrimination, which the European Court of Justice (ECJ) has a mission to strike down while permitting mere "disparity." She would have the ECJ ask whether cross-border activity or those engaging in it would be disadvantaged if the tax law of the jurisdiction that is being challenged were universalized, i.e., adopted to the last comma by all other jurisdictions. It's a proposed diagnostic rather than a proposed standard, because one could analogize it to the skin test for tuberculosis - the question is whether one actually has tuberculosis, not whether one's skin swells where they inject you, but if it doesn't swell then you're home free whereas if it does you face further tests.

The key problem here is that, while we have an objective standard for tuberculosis (once all the facts are known, one unmistakably either has it or doesn't), the same cannot as easily be said for tax discrimination. What is it? Mihir Desai, my co-convenor for the last seven weeks of the colloquium, and I felt that one really needs to define it, at least conceptually, in order to have any sense of what one is trying to do, but lawyers who have spent less time with economists than I have often scoff at this and say no worries, we can proceed anyway. Definition, we don't need no stinkin' definition.

Mihir proposed an idea that Michael Graetz and Al Warren have also written about, to the effect that discrimination might be found if one violates either capital import neutrality (equal treatment of one's outbound investments with those in the source jurisdiction) or capital export neutrality (equal treatment of home and outbound investment). The punchline Michael and Al derive from this, and which Mihir suggested as well, is that tax discrimination, if defined this way, is a hopelessly incoherent concept. All taxes, home and abroad, would need to be harmonized if one wanted to fully satisfy both CIN and CEN, and this is not among the options on the table. The Europeans in the room loudly hooted at this interpretation of what they and the ECJ have in mind by tax discrimination - as I gather they also did in the past, on multiple occasions, when Graetz and Warren proposed this view.

Luckily for me (since I have to make some comments later today at the EC Tax Policy conference here), I felt that the session eventually helped me to understand what they appear to have in mind when they discuss tax discrimination. Very roughly speaking, and falling short of an operational definition, I'd say the idea is (a) negative cross-border tax synergies, or higher total taxes from being in two jurisdictions than one would have had from the sum of being separately in each, that (b) are not considered justifiable all things considered (e.g., considering how bad the impact is, how deliberate it seems to be, how easily the government could have avoided it without being forced to change rules that it might like for "innocent" reasons, etc.).

Not very crisp, and I don't have the time pre-vacation to try to spell it out more, but for me at least this helps conceptually. Seen this way, the idea isn't incoherent, although it is a bit mushy, underspecified, and vague. And not necessarily a bad idea to have courts doing this in an ECJ-type or US national setting.

No comments: