Tuesday, January 31, 2017

Mark Gergen's "How to Tax Global Capital," part 2

Here is part 2 of my discussion of Mark Gergen’s paper, “How to Tax Global Capital,” which was presented yesterday at the NYU Tax Policy Colloquium. Part 1 is here.

While the new paper, discussing how the securities tax and the complementary tax would apply to cross-border activity, is still at an early stage, the basics at this point are as follows.

First, the securities tax would only be remitted by U.S. issuers. These might be defined as issuers who are listed on U.S. securities exchanges, possibly with an election whether or not to be classified as a U.S. issuer if one is also listed on foreign exchanges. Allowing electability would reflect the assumption, which I discussed in the prior post, that the securities and complementary taxes work in close tandem. (They might be especially well-matched, however, as to publicly traded “foreign” securities, as these might have readily discoverable market values that could be used for purposes of the complementary tax, even if the issuer wasn’t required to remit under the securities tax.)

Comment: My point in Part 1 of my comments regarding principle-agent issues and the “forced dividend” issue would affect how indifferent companies and their shareholders actually were (administrative and compliance costs aside) to U.S. issuer status, even assuming that the two taxes otherwise operate in close tandem.

Second, the paper suggests that foreigners should get a rebate for inbound foreign portfolio investment (FPI) that faced the securities tax. For example, if a French individual owns $1 million of Apple stock, then she should get a rebate from the U.S. Treasury for part or all of the $8,000 of securities tax that Apple remitted with respect to such stock. How best to do this remains open at this point.

Comment: This would be a policy change, insofar as foreign shareholders effectively bear their share of entity-level corporate income taxes. While it might be a desirable change, if we believe that under present law they don’t bear the true economic incidence of this tax anyway (and absent the treaty leverage we might get from initially charging the tax but being willing to reciprocally negotiate it away), it seems likely to present implementation difficulties.

Third, the paper suggests that inbound foreign direct investment (FDI), as in the case where a foreign corporation, owned by foreign individuals, conducts business activities in the U.S., should be exempt from both taxes. (Insofar as it’s owned by U.S. individuals, they’d pay the complementary tax.)

Comment: This may be undesirable insofar as the foreign companies are earning extra-normal returns in the U.S., on which we can make them bear some of the incidence. It also would lead to “round-tripping” problems, from the use by U.S. persons of foreign entities to avoid the wealth tax, if the complementary tax wasn’t fully up to the job of taking the place of the securities tax.

Fourth, the paper suggests that no foreign tax credits be allowed when U.S. persons owe complementary tax on foreign business operations that are also subject to source-based income taxation. The rationale is that U.S. companies are good at tax planning to avoid source-based taxes.

Comment: While I am generally no fan of foreign tax credits, there are further issues raised here for those who do like them, as source-based taxation is not always wholly avoidable. Also, there might be value to being able to negotiate down each other’s source-based taxes (e.g., via permanent establishment requirements for levying a source-based tax) in the treaty context.

Fifth, the complementary tax might not apply, for administrative and informational reasons, to foreign realty (e.g., London real estate, or natural resources holdings in a Gulf State).

Comment: I would certainly want to apply the complementary tax, if sufficiently administratively feasible, in these settings.

Sixth, with regard to the fundamental challenge of levying the tax on foreign assets – which often is thought to make wealth taxation highly problematic – the paper is bullish on the capacity of FATCA-like outreach to make enforcement feasible. It notes that this could in principle be handled via either withholding or information reporting (centered in either case on third-party agents), which might have to apply to tax havens in order for the complementary tax to work well enough.

Comment: Clearly this has the potential to be a huge implementation problem, which I trust the paper, as it develops, will address more fully.

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