Sunday, July 19, 2009

U.K. vs. U.S. international tax policy

My trip to Oxford earlier this month for a pair of conferences, one academic and the other mainly business and government, gave me a close-up look at how tax policymaking differs both substantively and procedurally in the two countries.

Substantively, the differences are pretty clear. The U.K. is in the process of greatly scaling back worldwide taxation of its resident corporations, whereas in the U.S. the Obama Administration has proposed heading in the opposite direction. This partly reflects differences in the countries' situations. The U.K. is obviously more deeply embedded in the "small open economy scenario" than we are, having a smaller internal market right next to the rest of Europe. Plus, corporate threats of expatriation in response to worldwide taxation play out very differently for a technical reason. In the U.S., where corporate residence depends on one's place of incorporation, companies that attempted "inversion transactions" a few years back (placing, say, a Caymans corporation at the top of the multinational chain and taking the U.S. firm out of the line of ownership of other foreign corporations) led to a huge 9/11-influenced political stink about "Benedict Arnold corporations" and the like.

In the U.K., by contrast, domestic residence follows from having U.K. headquarters. Thus, when companies threaten to leave, this apparently contributes to a very different reaction. Whereas the formalism of corporate inversion transactions helps feed the U.S. political anger about them, people in the U.K. evidently take to some extent the view that, if the headquarters truly leave, the expatriation transaction "should" work - the normative basis that people think of as underlying corporate residence has genuinely changed.

So by having a somewhat more economically substantive economic residence rule, the U.K. ends up inducing a greater sense in popular thinking that companies really can expatriate if they want to, leading to the threat of departure's having a different and stronger political valence. This in turn provides a big impetus for the drive to weaken worldwide residence-based corporate taxation in the U.K.

But all that concerns the substance of the policy, not the procedure. The latter is quite different as well. To begin with, as it's a parliamentary system, once the U.K. government announced what it wanted to do, everyone pretty much agreed that it was definitely going to happen, with only the details remaining open. Given the long-term political fragility of the Labor government, this presumably reflects some combination of the view that they can definitely serve out their time (without a no-confidence vote) and get this done before calling elections, and/or the view that the Conservatives would also be sure to adopt this policy given its pro-business direction.

Compare the fate of U.S. Administrations' tax policy proposals, which typically vary along a range from "maybe you'll get something loosely like this if you fight like hell and get lucky" to "dead on arrival."

Perhaps more surprising is the procedural differences in developing the details of the policy. In the U.S., the Administration will typically announce a full-blown (even if sketchy) proposal on which they have publicly consulted no-one. Obviously, there may be political dealings going on behind closed doors, and in the most extreme cases (such as the energy policy Cheney developed in 2001) they are pretty much explicitly written by current and past/future lobbyists on what's close to a pay-to-play basis. But given how contrary this is to the U.S. ideal of the government simply announcing its policy, in those cases the interest group input is as hidden as possible.

Then in Congress there's a lot of interest group input (obviously), and in recent years lobbyists have even been permitted to do the actual drafting (unthinkable in the 1980s and before). But even so the ideal is that the government policymakers decide, since public input is assumed (all too rightfully) to be sleazy giveaways to organized interests at the expense of the general public.

The biggest U.S. departure I can think of from this pertains to drafting regulations. The Treasury Department realizes it needs detailed input in order for regulations to be workable and to address the problems it aims at. So it solicits and receives notice & comment (as required by the Administrative Procedure Act), and makes serious use of input from affected taxpayers (and expert practitioners), even if it ultimately makes the calls itself subject to whatever White House control is being exercised (much greater in the GW Bush era than previously).

In the U.K., the Treasury announced the general details of its intended international tax policy change, but announced as well that it wanted extensive input from the business community in making workable rules that would avoid imposing excessive burdens. They more or less said they wanted to come up with something that the business community felt it could live with, although they didn't offer carte blanche to give people whatever they wanted. One big example of the input's impact: the UK government initially intended to retain their version of subpart F insofar as it taxes resident companies' foreign source passive income (such as portfolio dividends and interest), but has now pretty much agreed to give up on this point, subject only to doing what they feel is necessary to protect (a) overall revenues and (b) taxation of what is truly U.K.-source active business income.

It's easy to view this through a U.S. interest group lens, as merely a more overt and less secretive or shamefaced version of Cheney oil industry sleaze or lobbyists writing "rifleshot" tax giveaways for themselves. But, even leaving aside the distinct point that I tend to agree with this shift substantively, I get the sense that, while clearly the interest group story is a part of it (and the credible threat to expatriate is a further part of it), there also is some sense of consultation and consensus that really doesn't have an exact parallel in the U.S. setting.

The U.K.'s parliamentary system clearly plays a role in the U.S. versus U.K. procedural differences - but it doesn't necessarily explain this. After all, in the parliamentary model, it's vastly easier to shove an unpopular change down everyone's throat. I think the difference in scale may be crucial here. The U.S. is so big that wide-ranging consultation and consensus simply can't work the same way as in a smaller country like the U.K.

In Federalist # 10, Madison famously said that when you extend the sphere you create a better democratic process because there are too many interests for any one of them to be able to shove its agenda down everyone else's throat. The story here is very different and has an opposite normative spin (if I am right in viewing the U.K. example relatively benignly). Indeed, it's more of an anti-Federalist type story in which a "community" can run things with greater cooperation and consensus than a vast republic. Obviously, reflecting modern technology, the community-compatible size has greatly increased, and the underlying values being expressed are radically different.

Once again I find myself worrying that the U.S. has become unusually ungovernable by advanced-country standards.

1 comment:

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