The Resource The lessons of stateless income

The lessons of stateless income

The lessons of stateless income
The lessons of stateless income
This article continues the analysis begun in a companion paper, "Stateless income". This article extends the prior article along two margins. First, it considers the implications of the pervasive presence of stateless income for standard economic efficiency benchmarks by which international tax policy proposals are judged. Second, it analyses realistic steps that policymakers might take to respond to the phenomenon. Sections II and III analyse the problems that stateless income poses for standard efficiency benchmarks by first exploring the international tax policy recommendations that might logically be drawn from a hypothetical world without stateless income, and then introducing the phenomenon into the model. The analysis demonstrates that conclusions that are logically coherent in a world without stateless income do not follow once the presence of stateless income tax planning is considered. More specifically, this article identifies and develops the significance of implicit taxation as an underappreciated assumption in the standard economic efficiency models that are employed in arguing that the United States ought to adopt a territorial tax system; in doing so, the article relates the existing domestic implicit tax literature to the transnational context. In particular, the "capital ownership neutrality" standard (CON) has much to recommend it in theory, and is based on more sophisticated theories of the multinational firm and the mobility of capital than is the older "capital export neutrality" principle (CEN). But as presented by its developers, the CON principle contains an underappreciated assumption that source country taxation is fully capitalized into the prices of firms operating in that source country. Phrased alternatively, the CON model assumes that multinational firms face a constant after-tax rate of return everywhere in the world, and suffer the same tax burden everywhere, when "tax" for this purpose is defined to include both explicit and implicit taxes. This article argues that stateless income tax planning vitiates the plausibility of this critical assumption. The CON principle has been advanced as the basis of a policy recommendation for the United States to adopt a territorial tax system. But whatever the utility of the paradigm in wholly theoretical models, the full tax capitalization hypothesis on which the CON principle relies cannot describe a world imbued with stateless income. Without the full capitalization of source country taxes in firm valuations, reliance on the CON principle to recommend that the United States adopt a territorial tax system reduces to a plea for a "competitive" international tax framework, by which is meant a system no less generous than those available to firms domiciled in other countries. But that plea, in turn, is little different in practice from a call for trade export subsidies or the like, and strangely ignores the competitiveness of domestic operations. Section IV briefly considers some other implications of implicit tax analysis in the international tax arena, particularly the differential treatment of explicit and implicit taxes for those countries that (like the United States today) employ a foreign tax credit mechanism to prevent double taxation of foreign income. Sections V and VI then turn to a consideration of what tax policies might be implemented to respond to a world imbued with stateless income. Section V focuses on the practical implications of stateless income for territorial tax system design, while Section VI does the same for a possible alternative approach, in the form of worldwide tax consolidation. Each direction can fairly be criticized as suboptimal, even when measured against the standards of the quotidian world. Of the two, however, the worldwide tax consolidation approach, if coupled with an appropriately low corporate tax rate (perhaps in the neighbourhood of 25-27%) would prove more robust to the corrosive effects of stateless income tax planning, while preserving an authentically competitive environment for both domestic and international activities of U.S. firms
Citation source
In: Tax law review. - New York. - Vol. 65 (2011),
Kleinbard, E.D
Geographic coverage
Language note
  • stateless income
  • international tax planning
  • tax policy
  • tax system
  • foreign investment
  • capital export neutrality
  • territoriality principle
  • thin capitalization
  • CFC
  • transfer pricing
  • formulary apportionment
  • worldwide income
The lessons of stateless income

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